<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]      Annual Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934

         For the fiscal year ended MAY 31, 2001 or

[ ]      Transition Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934

         For the transition period from __________ to __________

         COMMISSION FILE NUMBER 1-9927

                         COMPREHENSIVE CARE CORPORATION
             (Exact name of Registrant as specified in its charter)

         DELAWARE                                           95-2594724
(State or other jurisdiction of                           (IRS Employer
incorporation or organization)                          Identification No.)

200 SOUTH HOOVER BLVD., SUITE 200
         TAMPA, FLORIDA                                        33609
(Address of principal executive offices)                     (Zip Code)

                                 (813) 288-4808
              (Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

<TABLE>
<CAPTION>
Title of each class                                     Name of each exchange on which registered
-------------------                                     -----------------------------------------
<S>                                                     <C>
COMMON STOCK, PAR VALUE $.01 PER SHARE                       OVER THE COUNTER BULLETIN BOARD
COMMON SHARE PURCHASE RIGHTS                                 OVER THE COUNTER BULLETIN BOARD
7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2010                   OVER-THE-COUNTER
</TABLE>

         Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                                                  Yes [X] No [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

         The aggregate market value of voting stock held by non-affiliates of
the Registrant at August 17, 2001, was $1,740,286 based on the average bid and
ask price of the Common Stock on August 17, 2001, as reported on the Over The
Counter Bulletin Board.

         At August 17, 2001, the Registrant had 3,867,303 shares of Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference to the Registrant's definitive proxy
statement for the Registrants 2001 annual meeting of stockholders, which is
presently scheduled to be held on November 2, 2001. The definitive proxy
statement will be filed no later than 120 days after the close of the
Registrant's fiscal year ended May 31, 2001.


<PAGE>   2

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                                     PART I

ITEM 1.  BUSINESS

ORGANIZATIONAL HISTORY

         Comprehensive Care Corporation(R) (the "Company") is a Delaware
Corporation organized in 1969. Unless the context otherwise requires, all
references to the Company include the Company's principal operating subsidiary,
Comprehensive Behavioral Care, Inc.(SM) (1) ("CompCare"(SM) (2) or "CBC") and
subsidiary corporations.

         The Company has provided managed behavioral healthcare services and
products since its acquisition of AccessCare, Inc. in December 1992. On August
1, 1995, the Company renamed this subsidiary to Comprehensive Behavioral Care,
Inc.(SM). In addition to its managed care products, CompCare provides contract
behavioral healthcare services through its subsidiary, Comprehensive Care
Integration, Inc. The Company's chief focus is its managed care business.

As of May 31, 2001, the Company had the following active subsidiaries:

<TABLE>
<CAPTION>

     Wholly-owned subsidiaries of Comprehensive Care Corporation              State of Incorporation
                                                                              ----------------------
     <S>                                                                      <C>
     Comprehensive Behavioral Care, Inc.                                             Nevada

     Wholly-owned subsidiaries of Comprehensive Behavioral Care, Inc.:

     Comprehensive Care Integration, Inc.                                            Delaware
     Healthcare Management Services, Inc.                                            Michigan
     Healthcare Management Services of Michigan, Inc.                                Michigan
     Behavioral Healthcare Management, Inc.                                          Michigan

     Affiliates sponsored by Comprehensive Behavioral Care, Inc.:

     Comprehensive Provider Networks of Texas, Inc.                                  Texas
</TABLE>

RECENT DEVELOPMENTS

-    During March 2001, the Company implemented a major contract to provide
     behavioral healthcare benefits to members in Connecticut. During Fiscal
     2001, the Company successfully implemented two major contracts, including
     the Connecticut contract, with only minimal increases in staff and other
     operating expenses.

-    In January 2001, the Company announced that its behavioral healthcare
     subsidiary, Comprehensive Behavioral Care, Inc. - Southeast Region
     ("CompCare") was awarded a Full Accreditation from the National Committee
     for Quality Assurance ("NCQA") for its HMO Commercial, HMO Medicaid, HMO
     Medicare and ASO Commercial product lines under NCQA's standards for
     managed behavioral healthcare organizations ("MBHOs"). Full Accreditation
     is granted for a period of three years to those plans that have excellent
     programs for continuous quality improvement and that meet NCQA's rigorous
     standards. This Full Accreditation award extends the NCQA accreditation to
     July 2002.

-    During Fiscal 2001, the Company resolved various legal matters that were
     pending at May 31, 2000, including all legal matters with Humana that were
     resolved effective February 8, 2001, with no material, adverse impact on
     the Company's financial position.

---------------
(1)      Comprehensive Behavioral Care, Inc. is a registered service mark of the
         Company.

(2)      CompCare is a registered service mark of Comprehensive Behavioral Care,
         Inc.


                                       2
<PAGE>   3

OPERATIONAL OVERVIEW

        For the fiscal year ended May 31, 2001, the Company reported a net loss
of approximately $1.1 million, which included the $0.5 million non-operating
loss related to the note receivable prepayment arrangement (see Note 9 - "Notes
Receivable"), $0.4 million of income in connection with two legal settlements, a
$0.3 million reduction in interest expense in connection with a change in
estimate specific to one third party liability (see Note 17, Item 2 -
"Commitments and Contingencies"), a $0.3 million bad debt recovery specific to
one contract that terminated in 1999, and $0.1 million of non-operating income
specific to proceeds received from one insurance settlement in which the Company
was a claimant. This compares to the Fiscal 2000 net loss of $5.8 million, which
is primarily attributable to the loss of two major contracts during the fourth
quarter of Fiscal 1999 and two major contracts during the third quarter of
Fiscal 2000. Additionally, the Fiscal 2000 loss included approximately $0.9
million of restructuring expenses in connection with the elimination of the
Company's California office and affiliated employees, approximately $0.6 million
of increased marketing and other costs specific to the Company's efforts to
regain business, approximately $0.1 million of operating costs incurred to
manage the Company's Year 2000 readiness program, and approximately $0.1 million
of costs in connection with the NCQA accreditation. These expenses were offset
in part by $0.3 million of revenue related to favorable cost report settlements
finalized during Fiscal 2000 and $0.2 million of non-operating gains recognized
during Fiscal 2000, primarily related to property tax refunds received specific
to assets disposed of during Fiscal 1999 or earlier.

        Stockholders' deficit increased to $11.8 million in Fiscal 2001 from
$10.7 million as of May 31, 2000. Cash and cash equivalents increased to $2.9
million as of May 31, 2001 from $2.5 million as of May 31, 2000.

BUSINESS GENERAL

        The Company manages the delivery of a continuum of psychiatric and
substance abuse services to commercial, Medicare, and Medicaid members on behalf
of employers, health maintenance organizations ("HMOs"), preferred provider
organizations ("PPOs"), government organizations, third-party claims
administrators, and commercial and other group purchasers of behavioral
healthcare services. The services provided by the Company are delivered through
management service agreements, administrative service agreements, and capitated
contracts. Under capitated contracts, the primary payer of healthcare services
pre-pays a fixed, per member per month ("PMPM") fee for covered psychiatric and
substance abuse services to the Company regardless of actual member utilization.
Current services include a broad spectrum of inpatient and outpatient mental
health and substance abuse therapy, counseling, and supportive interventions.
Programs are contracted through inpatient facilities as well as through
experienced outpatient practitioners.

        The Company currently provides behavioral healthcare services to
recipients in seven states, primarily through subcontracts with HMOs. The
programs and services currently offered by the Company include fully integrated,
capitated behavioral healthcare services, Employee Assistance Programs (EAPs),
case management/utilization review services, administrative services management
(ASOs), provider sponsored health plan development, preferred provider network
development, management and physician advisor reviews, and overall care
management services. The Company also manages behavioral healthcare services in
correctional settings or for parolees and probationers in Idaho. Fully
integrated capitated lives totaled approximately 560,000 and 370,000 at May 31,
2001 and 2000, respectively. ASO lives were approximately 295,000 and 185,000 at
May 31, 2001 and 2000, respectively. EAP lives were approximately 2,000 and
60,000 at May 31, 2001 and 2000, respectively. The Company manages its clinical
service programs using proven treatment technologies and trains its providers to
use effective, science-based treatment.

          The Company's objective is to keep members healthy and to manage its
costs through measures such as the monitoring of hospital inpatient admissions
and the review of authorizations for various types of outpatient therapy. The
goal is to combine access to quality behavioral healthcare services with
effective management controls in order to ensure the most cost-effective use of
healthcare resources.

SOURCES OF REVENUE

        The Company provides managed behavioral healthcare and substance abuse
services to recipients primarily through subcontracts with HMOs. Generally, the
Company receives a negotiated amount on a PMPM or capitated basis in exchange
for providing these services. The Company then contracts directly with providers
who receive a pre-determined fee-for-service rate or case rate. Alternatively,
the Company may contract with an integrated provider company on a sub-capitated
basis. Behavioral healthcare providers include psychiatrists, clinical


                                       3
<PAGE>   4

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

psychologists, and other licensed healthcare professionals. Under full-risk
capitation arrangements, the Company is responsible for the development and
management of service networks, including physicians, therapists and
hospitalization services and all claims are managed and paid by the Company. In
cases where the Company has made sub-capitation arrangements, the outside
company manages service delivery through a Company approved and credentialed
network that is guided by stringent quality standards.

DELIVERY OF HEALTHCARE SERVICES

        Members are usually directed to the Company by their employer, HMO, or
physician and, if deemed appropriate, receive an initial authorization for an
assessment. Based upon the initial assessment, a treatment plan is established
for the member. The Company attempts to control its healthcare expense risk by
entering into contractual relationships with healthcare providers, including
hospitals, physician groups and other managed care organizations, either on a
sub-capitated, discounted fee-for-service, or per-case basis. During Fiscal
2001, the Company provided services under capitated arrangements for commercial,
Medicare, Medicaid, and Children's Health Insurance Program patients in Florida
and Texas, commercial and Medicaid patients in Michigan, Medicaid patients in
Connecticut, and commercial patients in California, Georgia, Idaho, Kentucky and
Ohio.

         The new business in Fiscal 2001 included ASO, commercial, Medicaid,
Medicare, and Children's Health Insurance Program contracts in Florida, a
Medicaid contract in Connecticut, and Medicaid and Children's Health Insurance
Program contracts in Texas. The Company performs periodic reviews of its current
contracts with payers and may amend or review the terms of unprofitable
contracts.

OVERVIEW OF BEHAVIORAL HEALTHCARE INDUSTRY

         Behavioral healthcare involves the treatment of a variety of behavioral
health conditions such as emotional and mental health problems, substance abuse,
and other personal concerns that require outpatient and inpatient therapy. There
is a growing emphasis on the correlation between physical and mental illness and
the complexity of these conditions has required expanded services to address
social issues that exacerbate illness. As new psychotropic medications have
become available, HMOs have expressed to MBHOs their interest in the expansion
of pharmacy management.

          In response to escalating costs, behavioral healthcare companies, such
as CompCare, have expanded their focus on shaping provider networks to enhance
quality through efficient and cost-effective service. As a result of the
transition to managed behavioral healthcare, occupancy rates, average length of
stay, and the number of episodes of care for inpatient facilities have declined,
while outpatient treatment and alternative care services have increased.

GROWTH STRATEGY

         The Company's objective is to expand its presence in both existing and
new managed behavioral healthcare markets by obtaining new contracts with HMOs,
corporations, government agencies, and other payers through its reputation of
providing quality managed behavioral healthcare services with the most
cost-effective use of healthcare resources. New products for existing and
potential clients include preferred provider organization management,
psychotropic pharmacy benefit management, and administrative service capacity
management for public systems.

         CompCare has developed its behavioral corrections program and is
currently under contract with the state of Idaho to provide behavioral
healthcare services to inmates and parolees. In addition to the full range of
behavioral corrections healthcare services in the state of Idaho, CompCare is
now providing services in Michigan under contract with the Department of
Corrections ("DOC"). The Michigan DOC contract has provided a unique opportunity
for the Company to apply managed care principles to the management of
residential beds. The Company believes that the privatization of corrections
healthcare services will continue to provide opportunities for the Company to
expand the number and scope of its contracts with state and federal correctional
facilities. Additionally, the Company is developing products that will bring its
core competencies to new market areas such as behavioral pharmacy management and
preferred provider organization product management for HMOs and self-insured
employers, juvenile justice behavioral health, and public school systems.


                                       4
<PAGE>   5

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

COMPETITION

         The behavioral healthcare industry is highly competitive, with
approximately two dozen managed behavioral healthcare companies providing
service for an estimated 158 million lives in the United States. Additionally,
there are numerous local and regional group practices, community mental health
centers and behavioral healthcare hospitals that manage behavioral healthcare on
behalf of HMOs, PPOs and local governments. In the last several years, most
markets have seen greater migration to fully capitated HMO products, which is
the Company's primary niche.

                              GOVERNMENT REGULATION

REGULATORY MONITORING AND COMPLIANCE

         The Company is subject to extensive and evolving state and federal
regulations as well as changes in Medicaid and Medicare reimbursement. These
regulations range from licensure and compliance with regulations related to
insurance companies and other risk-assuming entities, to licensure and
compliance with regulations related to healthcare providers. These laws and
regulations may vary considerably among states. As a result, the Company may be
subject to the specific regulatory approach adopted by each state for regulation
of managed care companies and for providers of behavioral healthcare treatment
services. Currently, management cannot quantify the potential effects of
additional regulation of the managed care industry, but such costs will have an
adverse effect on further operations to the extent that they are not able to be
recouped in future managed care contracts.

         As of May 31, 2001, the Company managed approximately 588,000 lives in
connection with behavioral and substance abuse services covered through Medicaid
in Connecticut, Florida, Michigan and Texas. In addition, the Company manages
approximately 6,000 lives covered through Medicare in Florida. Any changes in
Medicaid and Medicare reimbursement could ultimately effect the Company through
contract bidding and cost structures with the HMOs first impacted by such
changes. At this time, the Company is unable to predict what effect, if any,
changes in Medicaid and Medicare legislation may have on its business.

         The Company is licensed in one state to operate as a Limited Health
Service Organization and is required to comply with certain laws and regulations
that, among other things, may require the Company to maintain certain types of
assets and minimum levels of deposits, capital, surplus, reserves, or net worth.

         The Company holds licenses or certificates to perform utilization
review and third party administrator ("TPA") services in certain states. Certain
of the services provided by the Company's managed behavioral healthcare
subsidiaries may be subject to such licensing requirements in other states.
There can be no assurance that additional utilization review or TPA licenses
will not be required or, if required, that the Company will qualify to obtain
such licenses.

         In many states, entities that assume risk under contract with licensed
insurance companies or HMOs have not been considered by state regulators to be
conducting an insurance or HMO business. As a result, the Company has not sought
licensure as either an insurer or HMO in certain states.

         The Company is subject to the requirements of the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"). The purpose of the HIPAA
provisions is to improve the efficiency and effectiveness of the healthcare
system through standardization of the electronic data interchange of certain
administrative and financial transactions and, also, to protect the security and
privacy of transmitted information. Entities subject to HIPAA include all
healthcare providers and all healthcare plans. To meet the specific requirements
of HIPAA, the Company will incur costs to insure the adequacy and security of
its healthcare information system and communication networks. Additionally, the
Company may incur costs to implement the specific transaction codes required by
HIPAA for claims, payment, enrollment, eligibility, or to become compliant with
security and privacy rules, which may be more stringent for providers of certain
behavioral healthcare services. The expected timetable to be compliant is
currently October 2002 for transaction code changes and April 2003 for
compliance with the privacy rules. The Company is currently evaluating its
systems and policies that are impacted by HIPAA. While these efforts will be
ongoing, the Company expects to meet all compliance rules and timetables with
respect to HIPAA regulations. Failure to do so may result in penalties and have
a material adverse effect on the Company's ability to retain its customers or to
gain new business.


                                       5
<PAGE>   6

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                                  ACCREDITATION

         To develop standards that effectively evaluate the structure and
function of medical and quality management systems in managed care
organizations, the National Committee on Quality Assurance, ("NCQA") has
developed an extensive review and development process in conjunction with the
managed care industry, healthcare purchasers, state regulators, and consumers.
The Standards for Accreditation of Managed Behavioral Healthcare Organizations
used by NCQA reviewers to evaluate a managed behavioral healthcare organization
address the following areas: quality improvement; utilization management;
credentialing; members' rights and responsibilities; preventative care
guidelines; and medical records. These standards validate that a managed
behavioral healthcare organization is founded on principles of quality and is
continuously improving the clinical care and services it provides. In 2001, NCQA
introduced these standards to health plan accreditations and now requires more
behavioral healthcare expertise to maintain accreditation status. NCQA also
utilizes Health Plan Employer Data and Information Set ("HEDIS"), which is a
core set of performance measurements developed to respond to complex but clearly
defined employer needs as standards for patient care and customer satisfaction.
CompCare's Southeast Region operation was awarded NCQA accreditation in August
2000 and Full Accreditation in January 2001. Full Accreditation is granted for a
period of three years to those plans that have excellent programs for continuous
quality improvement and that meet NCQA's rigorous standards. This Full
Accreditation award extends the NCQA accreditation to July 2002.

         The Company believes its NCQA accreditation to be beneficial to its
clients and their members that are served by the Company. Additionally, NCQA
accreditation may be an important consideration to prospective clients of the
Company.

                          ADMINISTRATION AND EMPLOYEES

         The Company's executive and administrative offices are located in
Tampa, Florida, where management maintains operations, business development,
accounting, reporting and information systems, and provider and member service
functions. The Company currently employs a total of 110 full-time and part-time
employees.

                         MANAGEMENT INFORMATION SYSTEMS

         The Company utilizes a fully integrated information system designed as
a complete managed care, three-tier application. The system, known as Nichols
TXEN ("TXEN"), was developed by Nichols Research, and the Company is a licensed
user of the TXEN system.

         All locations are strategically connected to the Company's frame relay
telecommunications network, allowing automated call-path routing to overlap
coverage for peak call times. Electronic access is provided and encouraged
between the Company and all provider groups wishing to participate in e-mail,
electronic billing, and electronic forms. Major care management functions such
as assessment information, service plans, initial authorizations, extension
requests, termination summaries, appeals, credentialing, billing, and
claim/encounter processing are backed by decision aids to correctly adjudicate
patient-specific transactions. The Company views the TXEN system to be adequate
for its current and future needs.

                               MARKETING AND SALES

         The Company's business development staff is responsible for generating
new sales leads and for preparing proposals and responses to formal commercial
and public sector Requests for Proposals ("RFPs"). The Company's marketing
initiatives are managed by the Chief Executive Officer. Regional and
administrative sales personnel strengthen the Company's marketing efforts by
providing a local presence and accountability. Sales expectations are integrated
into the performance requirements for executive staff and local sales personnel.


                                       6
<PAGE>   7

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                        EXECUTIVE OFFICERS OF THE COMPANY

The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
      NAME                AGE                                POSITION
      ----                ---                                --------

<S>                       <C>      <C>
Mary Jane Johnson          51      President(1)(2), Chief Executive Officer(1)(2), and Director(1)(2)

Robert J. Landis           42      Chairman of the Board of Directors(1)(2),
                                   Chief Financial Officer(1)(2), and Treasurer(1)(2)

Cathy J. Welch             41      Secretary(1)(2), Vice President of Finance/Controller(1)(2)

Thomas Clay                53      Senior Vice President of Clinical Operations(2)
</TABLE>

---------------
(1)      Comprehensive Care Corporation.

(2)      Comprehensive Behavioral Care, Inc. (Principal subsidiary of the
         Company).

         MARY JANE JOHNSON, RN, MBA, age 51. Ms. Johnson has served as President
and Chief Executive Officer since January 2000. Beginning in April 1999, Ms.
Johnson is a Class I director whose term expires at the 2003 Annual Meeting.
Since joining the Company in August 1996, Ms. Johnson has also served as Chief
Operating Officer of Comprehensive Care Corporation, an appointment that was
effective July 1999, and as Chief Executive Officer for the Company's principal
subsidiary, Comprehensive Behavioral Care, Inc., since August 1998. Ms. Johnson
served as Executive Director for Merit Behavioral Care from 1993 to 1996. Ms.
Johnson, a Registered Professional Nurse, has a Bachelors Degree in Nursing from
the State University of New York and a Masters Degree in Business Administration
from Adelphi University.

         ROBERT J. LANDIS, CPA, MBA, age 42. Mr. Landis has served as Chairman
of the Board of Directors since January 2000 and as Chief Financial Officer and
Treasurer since July 1998. Beginning in April 1999, Mr. Landis is a Class III
director whose term expires at the 2001 Annual Meeting. Mr. Landis served as
Treasurer of Maxicare Health Plans, Inc., a health maintenance organization,
from November 1988 to July 1998. Mr. Landis, a Certified Public Accountant,
received a Bachelors Degree in Business Administration from the University of
Southern California and a Masters Degree in Business Administration from
California State University at Northridge.

         CATHY J. WELCH, CPA, age 41. Ms. Welch has been employed by the Company
since February 1998 and has served as Controller since February 1999. Ms. Welch
has served as Corporate Secretary since her appointment on January 14, 2000.
Beginning on July 12, 1999, Ms. Welch is the Vice President of Finance and
Controller. Prior to her employment with the Company, Ms. Welch served in a
variety of financial management positions, beginning in November 1993 through
June 1997, for the Columbia/HCA hospitals in Florida. Ms. Welch, a Certified
Public Accountant, received a Bachelor of Arts Degree in Business Administration
from the University of South Florida.

         THOMAS CLAY, MSW, age 53. Mr. Clay has been employed by the Company
since December 1999 and has served as Senior Vice President of Clinical
Operations since October 2, 2000. During 1997, until joining the Company, Mr.
Clay worked as a behavioral healthcare consultant specializing in adapting
managed care technology to public sector services for providers and behavioral
healthcare organizations. From January 1991 through July 1997, Mr. Clay served
in a variety of executive positions for Tarrant County Mental Health Mental
Retardation Services in Fort Worth, Texas. Mr. Clay received a Master of Social
Work degree from Tulane University and a Bachelor of Arts Degree in Psychology
from the University of Texas at Austin.


                                       7
<PAGE>   8

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

ITEM 2.  PROPERTIES

         The Company does not currently own any real property. The following
table sets forth certain information regarding the properties leased by the
Company at May 31, 2001. All leases are triple net leases, under which the
Company bears all costs of operations, including insurance, taxes, and
utilities.

<TABLE>
<CAPTION>
                                                                                  MONTHLY
                                                                      LEASE       RENTAL
                         NAME AND LOCATION                           EXPIRES   (IN DOLLARS)
                         -----------------                           -------   ------------

<S>                                                                  <C>       <C>
CORPORATE HEADQUARTERS, REGIONAL, ADMINISTRATIVE,
AND OTHER OFFICES
   Tampa, Florida, Corporate Headquarters and Southeastern
           Regional offices.......................................     2006      $21,509

   Grand Prairie, Texas...........................................     2001        6,474
   Bloomfield Hills, Michigan.....................................     2004        8,378
   Comprehensive Care Integration, Inc., Boise, Idaho.............     2002      $ 2,681
</TABLE>

ITEM 3.  LEGAL PROCEEDINGS

(1)      On February 19, 1999, the California Superior Court denied the
         Company's Petition for Writ of Mandate of an adverse administrative
         appeal decision regarding application of the Maximum Inpatient
         Reimbursement Limitation to Medi-Cal reimbursement paid to Brea
         Neuropsychiatric Hospital for its fiscal periods 1983 through 1986. The
         Company owned this facility until its disposal in fiscal year 1991. The
         subject matter of the Superior Court action involved the refusal of the
         administrative law judge to order further reductions in the liability
         for costs associated with treating high cost, long stay Medi-Cal
         patients, which are commonly referred to as "outliers". The Company
         does not plan to appeal the California Superior Court decision for
         which the Notice of Entry of Judgment was entered on February 26, 1999.

         During the quarter ended November 30, 2000, the Company lowered its
         estimate by approximately $0.3 million specific to interest charges
         that were previously accrued in connection with this liability. This
         change in estimate was based on recent information provided to the
         Company by the California Department of Health Services. As of May 31,
         2001, the Company has approximately $1.0 million accrued relating to
         this matter.

         In March 2001, the Company submitted an offer to the State of
         California to resolve this liability at a substantially reduced amount.
         On April 23, 2001, the Company received a letter, dated April 11, 2001,
         from the State of California advising the company that its proposed
         settlement offer was not accepted and, additionally, requesting payment
         of approximately $0.8 million. The Company is contemplating a second
         settlement offer. There can be no assurance that the Sate of California
         will give consideration to such offer or agree to alternate terms.

(2)      In connection with the filing of its Federal income tax returns for
         fiscal years 1995 and 1996, the Company filed a tentative refund claim
         to carry back losses described in Section 172(f) of the Internal
         Revenue Code ("IRC"), requesting a refund to the Company of $9.4
         million and $5.5 million, respectively, of which refunds of $9.4
         million and $5.4 million were received. In addition, the Company also
         filed amended Federal income tax returns for fiscal years prior to
         1995, requesting similar refunds of losses carried back under Section
         172(f) of $6.2 million for 1986; $0.4 million for 1985; $0.7 million
         for 1983; and $0.4 million for 1982, a total of $7.7 million.

         During fiscal years 1997 and 1996, the Company recognized a portion of
         the refunds received as a tax benefit of $0.3 million and $2.4 million,
         respectively. The balance of the refunds received, $12.1 million, is
         recorded as a deferred liability, "Unbenefitted tax refunds received"
         pending resolution by the Internal Revenue Service ("IRS") of the
         appropriateness of the Section 172(f) carryback. The additional refunds
         requested under Section 172(f) for prior years of $7.7 million have not
         been received, nor has the Company recognized any tax benefit related
         to these potential refunds.


                                       8
<PAGE>   9

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

         Section 172(f) of the IRC provides for a ten-year net operating loss
         carryback for specific losses attributable to (1) a product liability
         or (2) a liability arising under a federal or state law or out of any
         tort if the act giving rise to such liability occurs at least three
         years before the beginning of the taxable year. The applicability of
         Section 172(f) to the type of business in which the Company operates is
         unclear. No assurance can be provided that the Company will be able to
         retain the refunds received to date or that the additional refunds
         requested will be received.

         As a result of the Section 172(f) carryback claims filed by the
         Company, and the tentative refunds received, the Company came under
         audit with respect to the tax years previously mentioned.

         On August 21, 1998, the Company received an examination report, dated
         August 6, 1998, from the IRS advising the Company that it was
         disallowing $12.4 million of the $14.8 million of refunds previously
         received, and the additional refunds requested of $7.7 million. If the
         position of the IRS were to be upheld, the Company would be required to
         repay $12.4 million in refunds previously received, plus accrued
         interest of approximately $6.7 million through May 31, 2001.
         Accordingly, the Company would be entitled to a repayment of the fees
         advanced to its tax advisor relating to these refunds of approximately
         $2.5 million, which is reported as "other receivable" in the
         accompanying balance sheets. This report commenced the administrative
         appeals process. The Company filed a protest letter with the IRS on
         November 6, 1998. The IRS reserves the right to assess and collect the
         tax previously refunded to the Company at any time during the appeals
         process.

         On July 11, 2000, the Company submitted an Offer in Compromise (the
         "Offer") to the Appeals Office of the IRS to resolve the controversy
         with respect to the refunds at a substantially reduced amount. The IRS
         is currently evaluating the Offer. A preliminary meeting with the IRS
         with respect to the Offer took place in October 2000 and, subsequent to
         this meeting, the Company has provided additional documents to the IRS.
         The Company has continued its discussions with the IRS during the first
         quarter of Fiscal 2002 and expects to continue such discussions during
         the second quarter of Fiscal 2002. There can be no assurance that the
         IRS will accept the Offer.

         From time to time, the Company and its subsidiaries are also parties to
and their property is subject to ordinary, routine litigation incidental to
their business. In some pending cases, claims may exceed insurance policy limits
and the Company or any one of its subsidiaries may have exposure to liability
that is not covered by insurance. Management believes that the outcome of such
lawsuits will not have a material adverse impact on the Company's financial
statements.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not applicable.


                                       9
<PAGE>   10

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                                    PART II.

ITEM 5.  MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's Common Stock is traded on the Over The Counter Bulletin
         Board ("OTC-BB") under the symbol CHCR. The following table sets forth
         the range of high and low closing prices for the Common Stock, as
         reported by the OTC-BB, for the fiscal quarters indicated:

<TABLE>
<CAPTION>
                                                          PRICE
         FISCAL YEAR                                 HIGH          LOW

         <S>            <C>                         <C>          <C>
         2001           FIRST QUARTER               $ 0.27       $ 0.17
                        SECOND QUARTER                0.23         0.09
                        THIRD QUARTER                 0.20         0.11
                        FOURTH QUARTER              $ 0.64       $ 0.25

         2000           FIRST QUARTER               $ 0.81       $ 0.41
                        SECOND QUARTER                0.50         0.19
                        THIRD QUARTER                 0.70         0.22
                        FOURTH QUARTER              $ 0.55       $ 0.20
</TABLE>

(a)      As of July 31, 2001, the Company had 1,432 common stockholders of
         record.

(b)      The Company did not pay any cash dividends on its Common Stock during
         any quarter of Fiscal 2001, 2000, or 1999 and does not contemplate the
         initiation of payment of any cash dividends in the foreseeable future
         (see ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS").

ITEM 6.  SELECTED FINANCIAL DATA

Prior to Fiscal 1993, the Company principally engaged in the ownership,
operation, and management of psychiatric and substance abuse programs in Company
owned, leased, or unaffiliated hospitals. During Fiscal 1999, the Company
completed its plan to dispose of its hospital business segment. The selected
consolidated financial data that follows includes the results of discontinued
hospital operations for the fiscal years ended May 31, 1999, 1998, and 1997 and
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere in this report. Reclassifications of prior
year amounts have been made to conform to the current year's presentation (see
ITEM 7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations").


                                       10
<PAGE>   11

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                        YEAR ENDED MAY 31,
STATEMENT OF OPERATIONS DATA:                                          2001        2000        1999        1998        1997
                                                                     --------    --------    --------    --------    --------
                                                                           (Amounts in thousands, except per share data)

<S>                                                                  <C>         <C>         <C>         <C>         <C>
OPERATING REVENUES ..............................................    $ 18,974    $ 17,719    $ 39,029    $ 39,787    $ 32,531
COSTS AND EXPENSES:
  Healthcare operating expenses .................................      16,108      15,801      29,778      30,808      27,996
  General and administrative expenses ...........................       3,842       6,974       9,148       7,085       7,383
  Provision for (recovery of) doubtful accounts .................        (439)       (606)      1,641          94         228
  Depreciation and amortization .................................         656         794       1,037         772         685
  Restructuring expenses ........................................         (30)        831         600          --         195
                                                                     --------    --------    --------    --------    --------
                                                                       20,137      23,794      42,204      38,759      36,487
                                                                     --------    --------    --------    --------    --------
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS ..............      (1,163)     (6,075)     (3,175)      1,028      (3,956)

OTHER INCOME (EXPENSES):
  Loss in connection with prepayment of note receivable .........        (496)         --          --          --          --
  Gain on sale of assets ........................................          --           9           2         314          47
  Loss on sale of assets ........................................          --          (1)         (4)         (9)        (33)
  Reduction in accrued interest expense .........................         290          --          --          --          --
  Other non operating income (expense) ..........................         332         204         (79)         50        (390)
  Interest income ...............................................         163         399         309         406         259
  Interest expense ..............................................        (208)       (289)       (281)       (172)       (732)
                                                                     --------    --------    --------    --------    --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ....      (1,082)     (5,753)     (3,228)      1,617      (4,805)
Income tax expense (benefit) ....................................          35          13        (146)         63        (341)
                                                                     --------    --------    --------    --------    --------
INCOME (LOSS) FROM CONTINUING OPERATIONS ........................      (1,117)     (5,766)     (3,082)      1,554      (4,464)

DISCONTINUED OPERATIONS:

Income (loss) from operations ...................................          --          --        (334)        417        (505)
Loss on disposal, including operating loss of $282 ..............          --          --        (698)         --          --
                                                                     --------    --------    --------    --------    --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM .........................      (1,117)     (5,766)     (4,114)      1,971      (4,969)
EXTRAORDINARY GAIN ..............................................          --          --         120          --       2,172
                                                                     --------    --------    --------    --------    --------
NET INCOME (LOSS) ...............................................      (1,117)     (5,766)     (3,994)      1,971      (2,797)

Dividends on convertible Preferred Stock ........................          --          --         (55)        (82)        (31)
                                                                     --------    --------    --------    --------    --------

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS ...........    $ (1,117)   $ (5,766)   $ (4,049)   $  1,889    $ (2,828)
                                                                     ========    ========    ========    ========    ========

BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations ........................    $  (0.29)   $  (1.51)   $  (0.88)   $   0.44    $  (1.46)
Discontinued operations:
  Income (loss) from operations .................................          --          --       (0.09)       0.12       (0.16)
  Loss on disposal ..............................................          --          --       (0.20)         --          --

Extraordinary item ..............................................          --          --        0.03          --        0.70
                                                                     --------    --------    --------    --------    --------
Net income (loss) ...............................................    $  (0.29)   $  (1.51)   $  (1.14)   $   0.56    $  (0.92)
                                                                     ========    ========    ========    ========    ========

DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations ........................    $  (0.29)   $  (1.51)   $  (0.88)   $   0.40    $  (1.46)
Discontinued operations:
  Income (loss) from operations .................................          --          --       (0.09)       0.11       (0.16)
  Loss on disposal ..............................................          --          --       (0.20)         --          --

Extraordinary item ..............................................          --          --        0.03          --        0.70
                                                                     --------    --------    --------    --------    --------
Net income (loss) ...............................................    $  (0.29)   $  (1.51)   $  (1.14)   $   0.51    $  (0.92)
                                                                     ========    ========    ========    ========    ========

BALANCE SHEET DATA:
Working capital (deficit) .......................................    $(11,770)   $(12,245)   $ (9,355)   $ (8,859)   $(12,657)
Total assets ....................................................       9,754      21,275      29,066      30,405      24,746
Long-term debt ..................................................       2,244       2,244       2,253       2,704       2,712
Long-term debt including current maturities and debentures ......       2,244       2,244       2,256       2,706       2,758
Stockholders' deficit ...........................................    $(11,778)   $(10,672)   $ (4,914)   $ (1,286)   $ (3,570)
</TABLE>


                                       11
<PAGE>   12

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

         This Annual Report on Form 10-K includes forward-looking statements,
the realization of which may be impacted by certain important factors discussed
below under "Risk Factors -- Important Factors Related to Forward-Looking
Statements and Associated Risks".

GENERAL

         The Company reported a net loss of $1.1 million, or $0.29 per share,
for the fiscal year ended May 31, 2001 compared to the net loss of $5.8 million,
or $1.51 per share, for the fiscal year ended May 31, 2000. The following table
summarizes the Company's financial data for the fiscal years ended May 31, 2001
and 2000 (in thousands):

<TABLE>
<CAPTION>
                                          CONSOLIDATED   CONSOLIDATED
                                           OPERATIONS     OPERATIONS
                                          FISCAL 2001    FISCAL 2000
                                          ------------   ------------

<S>                                       <C>            <C>
Operating revenues .....................    $ 18,974       $ 17,719

Healthcare operating expenses ..........      16,108         15,801
General/administrative expenses ........       3,842          6,974
Other operating expenses ...............         187          1,019
                                            --------       --------

                                              20,137         23,794
                                            --------       --------
   Operating loss ......................    $ (1,163)      $ (6,075)
                                            ========       ========
</TABLE>

RESULTS OF OPERATIONS - THE YEAR ENDED MAY 31, 2001 COMPARED TO THE YEAR ENDED
MAY 31, 2000.

          The Company reported an operating loss of $1.2 million for the fiscal
year ended May 31, 2001. Operating revenues increased by $1.3 million, or 7.1%,
for the fiscal year ended May 31, 2001 compared to the fiscal year ended May 31,
2000. This increase is attributable to the implementation in Fiscal 2001 of two
major, managed care contracts which accounted for $4.9 million of operating
revenues during the fiscal year ended May 31, 2001, offset by the loss of
revenues during Fiscal 2001 specific to the Humana contracts and the loss of two
major contracts that terminated during the third quarter of Fiscal 2000.

         Healthcare operating expenses increased by approximately $0.3 million,
or 1.9%, for the fiscal year ended May 31, 2001 as compared to the fiscal year
ended May 31, 2000. This increase is directly attributable to the new business
added during Fiscal 2001. Healthcare operating expense as a percentage of
operating revenue decreased from 89.2% for the fiscal year ended May 31, 2000 to
84.9% for the fiscal year ended May 31, 2001. Efforts are being made to further
increase revenues during Fiscal 2002 without adding significantly to our
healthcare operating costs.

         General and administrative expenses decreased by approximately $3.1
million, or 44.9%, for the fiscal year ended May 31, 2001 as compared to the
fiscal year ended May 31, 2000. General and administrative expense as a
percentage of revenue decreased from 39.4% for the fiscal year ended May 31,
2000 to 20.3% for the fiscal year ended May 31, 2001. This decrease is
attributable to the significant cost reductions that were initiated following
the loss of two major, managed care contracts in Fiscal 2000.

         Other operating expenses decreased by $0.8 million for the fiscal year
ended May 31, 2001 compared to the fiscal year ended May 31, 2000. This decrease
is primarily attributable to the $0.8 million of restructuring expense in Fiscal
2000.

         Management believes that the Company's current infrastructure is
sufficient to support continued revenue growth during Fiscal 2002 without the
need for any significant increase to staff or other operating costs.


                                       12
<PAGE>   13

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

RESULTS OF OPERATIONS - YEAR ENDED MAY 31, 2000 COMPARED TO THE YEAR ENDED MAY
31, 1999.

         The Company reported an operating loss of approximately $6.1 million
from continuing operations for the fiscal year ended May 31, 2000, primarily
attributable to the loss of two major, managed care contracts during the fourth
quarter of Fiscal 1999. Additionally, this loss included approximately $0.9
million of restructuring expenses in connection with the elimination of the
Company's California office and affiliated employees, approximately $0.6 million
of increased marketing and other costs specific to the Company's efforts to
regain business, approximately $0.1 million of operating costs incurred to
manage the Company's Year 2000 readiness program, and approximately $0.1 million
of costs in connection with the NCQA accreditation. These expenses were offset
in part by $0.3 million of revenue related to favorable cost report settlements
that took place during the year. This is compared to an operating loss of $3.2
million from continuing operations reported for the fiscal year ended May 31,
1999, which included approximately $0.9 million of bad debt expense specific to
two major contracts that terminated during Fiscal 1999, $0.3 million of bad debt
expense specific to hospital accounts receivable that were written off after the
March 11, 1999 disposal date, and $0.2 million of bad debt expense specific to
CCI contracts that terminated prior to May 31, 1999. Additionally, the Company
incurred $0.8 million of expense in its unsuccessful bid for a managed care
contract in Argentina and approximately $0.6 million of restructuring costs
related to the loss of the PCA contract in Puerto Rico during Fiscal 1999.

         Operating revenues from continuing operations decreased by
approximately 54.6%, or $21.3 million, for the fiscal year ended May 31, 2000
compared to the fiscal year ended May 31, 1999. This decrease is primarily
attributable to the loss of two major contracts during the fourth quarter of
Fiscal 1999 and two major contracts during the third quarter of Fiscal 2000.

         Healthcare operating expenses from continuing operations decreased by
46.9%, or $14.0 million, for the fiscal year ended May 31, 2000 as compared to
the fiscal year ended May 31, 1999. This decrease is attributable to the loss of
revenue specific to two major contracts that terminated in Fiscal 1999 and two
major contracts that terminated in Fiscal 2000. Healthcare operating expense as
a percentage of net revenue from continuing operations increased from 76.3% for
the fiscal year ended May 31, 1999 to 89.2% for the fiscal year ended May 31,
2000. This percentage increase is attributable to $0.3 million of claims expense
recorded during the fiscal year ended May 31, 2000 specific to the Puerto Rico
contract, which terminated in Fiscal 1999. Additionally, this percentage
increase is attributable to continuing fixed costs that cannot be tied to the
specific contracts that were terminated during Fiscal 1999.

         General and administrative expenses from continuing operations
decreased by approximately 23.8%, or $2.2 million, for the fiscal year ended May
31, 2000 as compared to the fiscal year ended May 31, 1999. This decrease is
primarily attributable to $1.5 million of savings in legal and accounting fees,
a $0.5 million reduction in building lease costs, a $0.2 million savings in
directors fees, $0.2 million of savings in corporate salaries, and a $0.1
million reduction in shareholder reporting costs in comparison to costs incurred
for the same period during Fiscal 2000. These savings were offset by $0.3
million of fees paid to marketing consultants during Fiscal 2000. General and
administrative costs as a percentage of revenue increased from 23.4% for the
fiscal year ended May 31, 1999 to 39.4% for the fiscal year ended May 31, 2000.
This percentage increase is attributable to the continuing fixed costs that
could not be tied to the specific contracts that were terminated during Fiscal
1999.

         Other operating expenses from continuing operations decreased by $2.3
million for the fiscal year ended May 31, 2000 compared to the fiscal year ended
May 31, 1999. This decrease is primarily attributable to the $0.9 million of bad
debt expense recognized during the fiscal year ended May 31, 1999 specific to
the two major, managed care contracts that terminated during Fiscal 1999, $0.3
million of bad debt expense specific to hospital accounts receivable that were
written off after the March 11, 1999 disposal date, and $0.2 million of bad debt
expense specific to CCI contracts that were terminated prior to May 31, 1999. In
contrast to the $1.6 million of bad debt expense recognized in Fiscal 1999, the
Company recognized recoveries totaling $0.6 million during the fiscal year ended
May 31, 2000. Additionally, expense for depreciation and amortization decreased
by $0.2 million during Fiscal 2000 in comparison to the prior year. These gains
were offset by a restructuring charge related to the elimination of the
Company's California administrative office and related executive staff during
Fiscal 2000. Such costs exceeded the prior year restructuring charge, which
pertained to the loss of the Puerto Rico contract, by approximately $0.2
million.


                                       13
<PAGE>   14

LIQUIDITY AND CAPITAL RESOURCES

         At May 31, 2001, the Company had unrestricted cash and cash equivalents
of $2.9 million. During the fiscal year ended May 31, 2001, the Company used
$0.1 million in its continuing operations. Additionally, $0.5 million was
provided by its investing activities. The Company reported a net loss of
approximately $1.1 million for the fiscal year ended May 31, 2001, compared to a
net loss of $5.8 million for the fiscal year ended May 31, 2000. The Company has
an accumulated deficit of $63.6 million and total stockholders' deficit of $11.8
million as of May 31, 2001. Additionally, the Company's current assets at May
31, 2001 amounted to approximately $7.5 million and current liabilities were
approximately $19.3 million, resulting in a working capital deficiency of
approximately $11.8 million. The Company's primary use of available cash
resources is to expand its managed care business and fund operations.

         The Company's available sources of cash during the next fiscal year
will be derived from operations. At this time, the Company cannot state with any
degree of certainty whether additional equity or debt financing will be
available to it and, if available, that the source of financing would be
available on terms and conditions acceptable to the Company. Any potential
sources of additional financing may be subject to business and economic
conditions outside the Company's control.

         The working capital and stockholders' deficits raise doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amount
and classification of liabilities that may result from the outcome of this
uncertainty.

RISK FACTORS

IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

         This Annual Report on Form 10-K contains certain forward-looking
statements that are based on current expectations and involve a number of risks
and uncertainties. Factors that may materially affect revenues, expenses and
operating results include, without limitation, the Company's success in (i)
expanding the managed behavioral healthcare operations, (ii) effective
management in the delivery of services, (iii) risk and utilization in context of
capitated payouts, and (iv) retaining certain refunds from the IRS (see Note 13
to the audited consolidated financial statements -- "Income Taxes").

         Assumptions relating to the foregoing involve judgments that are
difficult to predict accurately and are subject to many factors that can
materially affect results. Budgeting and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments, the impact of
which may cause the Company to alter its budgets which may in turn affect the
Company's results. In light of the factors that can materially affect the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.

CONCENTRATION OF RISK

         The Company currently has ten contracts with three HMOs to provide
behavioral healthcare services under commercial, Medicaid, and Medicare plans,
to contracted members in Connecticut, Florida, and Texas. These combined
contracts represent approximately 51.7% and 14.1% of the Company's operating
revenue for the fiscal year ended May 31, 2001 and 2000, respectively. The terms
of each contract are generally for one-year periods and are automatically
renewable for additional one-year periods unless terminated by either party.

UNCERTAINTY OF FUTURE PROFITABILITY

         As of May 31, 2001, the Company had stockholders' deficit of $11.8
million and a working capital deficiency of approximately $11.8 million. The
Company had a net loss for the fiscal year ended May 31, 2001 of approximately
$1.1 million. There can be no assurance that the Company will be able to achieve
and sustain profitability or that the Company can achieve and maintain positive
cash flow on an ongoing basis. Present results of operations are not necessarily
indicative of anticipated future results of operations.


                                       14
<PAGE>   15

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

NEED FOR ADDITIONAL FUNDS; UNCERTAINTY OF FUTURE FUNDING

         During recent fiscal years, a principal source of liquidity has been
the sale of hospital facilities. During Fiscal 1999, the Company completed its
plan to dispose of its hospital business segment and, as such, does not
currently own any hospital facilities. Subject to various market conditions, an
additional source of liquidity could be the issuance of additional equity
securities, which could result in substantial dilution to stockholders.

         The Company may be required to repay a portion of the tax refunds
received from the Internal Revenue Service for Fiscal 1996 and 1995, which
amounted to $9.4 million and $5.4 million, respectively (see "Taxes" below and
Note 13 to the audited, consolidated financial statements - "Income Taxes").
Further, the Company may be required to repay some amount to Medi-Cal in
connection with the judgment entered on February 26, 1999, which is more fully
described under Item 1, Legal Proceedings, above.

TAXES

         In connection with the filing of its Federal income tax returns for
fiscal years 1995 and 1996, the Company filed a tentative refund claim to carry
back losses described in Section 172(f) of the Internal Revenue Code ("IRC"),
requesting a refund to the Company of $9.4 million and $5.5 million,
respectively, of which refunds of $9.4 million and $5.4 million were received.
In addition, the Company also filed amended Federal income tax returns for
fiscal years prior to 1995, requesting similar refunds of losses carried back
under Section 172(f) of $6.2 million for 1986; $0.4 million for 1985; $0.7
million for 1983; and $0.4 million for 1982, a total of $7.7 million.

         During fiscal years 1997 and 1996, the Company recognized a portion of
the refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, is recorded as
a deferred liability, "Unbenefitted tax refunds received" pending resolution by
the Internal Revenue Service ("IRS") of the appropriateness of the Section
172(f) carryback. The additional refunds requested under Section 172(f) for
prior years of $7.7 million have not been received, nor has the Company
recognized any tax benefit related to these potential refunds.

         Section 172(f) of the IRC provides for a ten-year net operating loss
carryback for specific losses attributable to (1) a product liability or (2) a
liability arising under a federal or state law or out of any tort if the act
giving rise to such liability occurs at least three years before the beginning
of the taxable year. The applicability of Section 172(f) to the type of business
in which the Company operates is unclear. No assurance can be provided that the
Company will be able to retain the refunds received to date or that the other
refunds requested will be received.

         On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was disallowing $12.4
million of the $14.8 million of refunds previously received, and the additional
refunds requested of $7.7 million. If the position of the IRS were to be upheld
the Company would be required to repay $12.4 million in refunds previously
received, plus accrued interest of approximately $6.7 million through May 31,
2001. Accordingly, the Company would be entitled to a repayment of the fees
advanced to its tax advisor relating to these refunds of approximately $2.5
million, which is reported as "other receivable" in the accompanying balance
sheets. This report commenced the administrative appeals process. The Company
filed a protest letter with the IRS on November 6, 1998. The IRS reserves the
right to assess and collect the tax previously refunded to the Company at any
time during the appeals process.

         On July 11, 2000, the Company submitted an Offer in Compromise (the
"Offer") to the Appeals Office of the IRS to resolve the controversy with
respect to the refunds at a substantially reduced amount. The IRS is currently
evaluating the Offer. A preliminary meeting with the IRS with respect to the
Offer took place in October 2000 and, subsequent to this meeting, the Company
has provided additional documents to the IRS. The Company has continued its
discussions with the IRS during the first quarter of Fiscal 2002 and expects to
continue such discussions during the second quarter of Fiscal 2002. There can be
no assurance that the IRS will accept the Offer.

UNCERTAINTY OF PRICING; HEALTHCARE REFORM AND RELATED MATTERS

         Managed care operations are at risk for costs incurred to supply agreed
upon levels of service. Failure to anticipate or control costs could have
material, adverse effects on the Company. Additionally, the business of
providing services on a full-risk capitation basis exposes the Company to the
additional risk that contracts negotiated and entered into may ultimately be
determined to be unprofitable if utilization levels require the Company to
deliver and provide services at capitation rates which do not account for or
factor in such utilization levels.


                                       15
<PAGE>   16

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

         The levels of revenues and profitability of healthcare companies may be
affected by the continuing efforts of governmental and third party payers to
contain or reduce the costs of healthcare through various means. In the United
States, there have been, and the Company expects that there will continue to be,
a number of federal and state proposals to implement governmental controls on
the price of healthcare. It is uncertain what legislative proposals will be
adopted or what actions federal, state or private payers for healthcare goods
and services may take in response to any healthcare reform proposals or
legislation. The Company cannot predict the effect that healthcare reforms may
have on its business and no assurance can be given that any such reforms will
not have a material adverse effect on the Company.

DEPENDENCE ON KEY PERSONNEL

         The Company depends and will continue to depend upon the services of
its senior management and skilled personnel.

SHARES ELIGIBLE FOR FUTURE SALE

         The Company has issued or committed to issue 9,000 shares related to
the 7 1/2% convertible subordinated debentures due April 15, 2010, and options
or other rights to purchase approximately 1,103,000 shares. The Company may
contemplate issuing additional amounts of debt, equity or convertible securities
in public or private transactions for use in fulfilling its future capital needs
(see "Need for Additional Funds; Uncertainty of Future Funding"). Issuance of
additional equity could adversely affect the trading price of the Company's
Common Stock.

ANTI-TAKEOVER PROVISIONS

         The Company's Restated Certificate of Incorporation provides for 60,000
authorized shares of Preferred Stock, the rights, preferences, qualifications,
limitations and restrictions of which may be fixed by the Board of Directors
without any vote or action by the stockholders that could have the effect of
diluting the Common Stock or reducing working capital that would otherwise be
available to the Company. As of May 31, 2001, there are no outstanding shares of
Preferred Stock (see Note 16 to the audited consolidated financial statements --
"Preferred Stock, Common Stock, and Stock Option Plans"). The Company's Restated
Certificate of Incorporation also provides for a classified board of directors
with directors divided into three classes serving staggered terms. The Company's
stock option plans generally provide for the acceleration of vesting of options
granted under such plans in the event of certain transactions which result in a
change of control of the Company. Section 203 of the General Corporation Law of
Delaware prohibits the Company from engaging in certain business combinations
with interested stockholders. In addition, each share of the Company's Common
Stock includes one right on the terms and subject to the conditions of the
Rights Agreement between the Company and Continental Stock Transfer & Trust
Company. These provisions may have the effect of delaying or preventing a change
in control of the Company without action by the stockholders and therefore could
adversely affect the price of the Company's Common Stock or the possibility of
sale of shares to an acquiring person.


                                       16
<PAGE>   17

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                 Index to Consolidated Financial Statements and
                          Financial Statement Schedules

                     Years Ended May 31, 2001, 2000 and 1999

<TABLE>
<S>                                                                                                   <C>
Report of Richard A. Eisner & Company, LLP.....................................................          18
Consolidated Balance Sheets, May 31, 2001 and 2000.............................................          19
Consolidated Statements of Operations, Years Ended May 31, 2001, 2000 and 1999.................          20
Consolidated Statements of Stockholders' Deficit, Years Ended May 31, 2001, 2000 and 1999......          21
Consolidated Statements of Cash Flows, Years Ended May 31, 2001, 2000 and 1999.................          22
Notes to Consolidated Financial Statements, Years Ended May 31, 2001, 2000 and 1999............       23-38
</TABLE>


                                       17
<PAGE>   18
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Comprehensive Care Corporation

         We have audited the accompanying consolidated balance sheets of
Comprehensive Care Corporation and subsidiaries as of May 31, 2001 and 2000, and
the related consolidated statements of operations, stockholders' deficit and
cash flows for each of the three years in the period ended May 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Comprehensive Care Corporation and subsidiaries as of May 31, 2001 and 2000, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended May 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.

         As discussed in Note 3, the Company's working capital deficiency and
stockholders' deficit raise substantial doubt about its ability to continue as a
going concern. Management's plans as to these matters are also described in
Notes 3 and 13. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.


/s/ Richard A. Eisner & Company, LLP

New York, New York
August 3, 2001


                                       18
<PAGE>   19

                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                          MAY 31,
                                                                                      2001        2000
                                                                                    --------    --------
                                                                                   (Amounts in Thousands)

<S>                                                                                 <C>         <C>
ASSETS
Current assets:
   Cash and cash equivalents ...................................................    $  2,891    $  2,518
   Restricted cash .............................................................          48       1,444
   Accounts receivable, less allowance for doubtful accounts of $11 and $13 ....         422         276
   Accounts receivable - managed care reinsurance contract .....................         783          --
   Accounts receivable - pharmacy and laboratory costs .........................          --      10,469
   Other receivable ............................................................       2,548       2,548
   Other current assets ........................................................         817         147
                                                                                    --------    --------
Total current assets ...........................................................       7,509      17,402

Property and equipment, net ....................................................         555       1,086
Notes receivable ...............................................................         164       1,145
Goodwill, net ..................................................................         936       1,008
Restricted cash ................................................................         561         486
Other assets ...................................................................          29         148
                                                                                    --------    --------
Total assets ...................................................................    $  9,754    $ 21,275
                                                                                    ========    ========

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable and accrued liabilities ....................................    $  3,302    $  4,232
   Accrued claims payable ......................................................       3,071       2,810
   Accrued reinsurance claims payable ..........................................         783          --
   Accrued pharmacy and laboratory costs payable ...............................          --      10,469
   Unbenefitted tax refunds received ...........................................      12,092      12,092
   Income taxes payable ........................................................          31          44
                                                                                    --------    --------
Total current liabilities ......................................................      19,279      29,647
                                                                                    --------    --------

Long-term liabilities:
   Long-term debt ..............................................................       2,244       2,244
   Other liabilities ...........................................................           9          56
                                                                                    --------    --------
Total long-term liabilities ....................................................       2,253       2,300
                                                                                    --------    --------
Total liabilities ..............................................................      21,532      31,947
                                                                                    --------    --------
Commitments and Contingencies (Notes 4 and 13)
Stockholders' deficit:
   Preferred stock, $50.00 par value; authorized 60,000 shares; none issued ....          --          --
   Common stock, $0.01 par value; authorized 12,500,000 shares; issued
    and outstanding 3,817,803 and 3,817,822 ....................................          38          38
   Additional paid-in-capital ..................................................      51,813      51,812
   Deferred compensation .......................................................          --         (10)
   Accumulated deficit .........................................................     (63,629)    (62,512)
                                                                                    --------    --------
Total stockholders' deficit ....................................................     (11,778)    (10,672)
                                                                                    --------    --------
Total liabilities and stockholders' deficit ....................................    $  9,754    $ 21,275
                                                                                    ========    ========
</TABLE>

                             See accompanying notes.


                                       19
<PAGE>   20
                COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED MAY 31,
                                                                                  2001        2000        1999
                                                                                --------    --------    --------
                                                                                     (Amounts in thousands,
                                                                                     except per share data)
<S>                                                                             <C>         <C>         <C>
OPERATING REVENUES ...................................................          $ 18,974    $ 17,719    $ 39,029

COSTS AND EXPENSES:
  Healthcare operating expenses ......................................            16,108      15,801      29,778
  General and administrative expenses ................................             3,842       6,974       9,148
  Provision for (recovery of) doubtful accounts ......................              (439)       (606)      1,641
  Depreciation and amortization ......................................               656         794       1,037
  Restructuring expenses .............................................               (30)        831         600
                                                                                --------    --------    --------
                                                                                  20,137      23,794      42,204
                                                                                --------    --------    --------
OPERATING LOSS BEFORE ITEMS SHOWN BELOW ..............................            (1,163)     (6,075)     (3,175)

OTHER INCOME (EXPENSE):

  Loss in connection with prepayment of note receivable ..............              (496)         --          --
  Gain on sale of assets .............................................                --           9           2
  Loss on sale of assets .............................................                --          (1)         (4)
  Reduction in accrued interest expense ..............................               290          --          --
  Other non operating income (expense) ...............................               332         204         (79)
  Interest income ....................................................               163         399         309
  Interest expense ...................................................              (208)       (289)       (281)
                                                                                --------    --------    --------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ..................            (1,082)     (5,753)     (3,228)
Income tax expense (benefit) .........................................                35          13        (146)
                                                                                --------    --------    --------
LOSS FROM CONTINUING OPERATIONS ......................................            (1,117)     (5,766)     (3,082)

DISCONTINUED OPERATIONS:
  Loss from operations ...............................................                --          --        (334)
  Loss on disposal, including operating loss of $282 .................                --          --        (698)
                                                                                --------    --------    --------
LOSS BEFORE EXTRAORDINARY GAIN .......................................            (1,117)     (5,766)     (4,114)
EXTRAORDINARY GAIN ...................................................                --          --         120
                                                                                --------    --------    --------
NET LOSS .............................................................            (1,117)     (5,766)     (3,994)

Dividends on convertible Preferred Stock .............................                --          --         (55)
                                                                                --------    --------    --------

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS .........................          $ (1,117)   $ (5,766)   $ (4,049)
                                                                                ========    ========    ========
BASIC AND DILUTED LOSS PER SHARE:
Loss from continuing operations ......................................          $  (0.29)   $  (1.51)   $  (0.88)
Discontinued operations:
  Loss from operations ...............................................                --          --       (0.09)
  Loss on disposal ...................................................                --          --       (0.20)
Extraordinary gain ...................................................                --          --        0.03
                                                                                --------    --------    --------
Net Loss .............................................................          $  (0.29)   $  (1.51)   $  (1.14)
                                                                                ========    ========    ========

Weighted Average Common Shares Outstanding (basic and diluted) .......             3,818       3,818       3,562
                                                                                ========    ========    ========
</TABLE>

                             See accompanying notes


                                       20

<PAGE>   21
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                                  ADDITIONAL
                                                                PREFERRED STOCK             COMMON STOCK            PAID-IN
                                                            SHARES          AMOUNT        SHARES     AMOUNT         CAPITAL
                                                            ------         -------        ------     ------       ----------
<S>                                                         <C>            <C>            <C>          <C>        <C>
BALANCE, MAY 31, 1998 .................................         41         $ 2,176         3,415        $34        $ 49,201
   Net loss ...........................................         --              --            --         --              --
   Adjust shares issued for the HMS acquisition .......         --              --            --         --             (94)
   Exercise of stock options ..........................         --              --            22         --             155
   Dividends on preferred stock .......................         --              55            --         --              --
   Shares issued for preferred stock conversion .......        (41)         (2,231)          344          4           2,227
   Shares issued for debenture exchange offer .........         --              --            37         --             305
                                                             -----         -------        ------      -----        --------
BALANCE, MAY 31, 1999 .................................         --              --         3,818        $38        $ 51,794
   Net loss ...........................................         --              --            --         --              --
   Compensatory stock options granted .................         --              --            --         --              18
   Amortization of deferred compensation ..............         --              --            --         --              --
                                                             -----         -------        ------      -----        --------
BALANCE, MAY 31, 2000 .................................         --              --         3,818        $38        $ 51,812
   Net loss ...........................................         --              --            --         --              --
   Compensatory stock options granted .................         --              --            --         --               1
   Amortization of deferred compensation ..............         --              --            --         --              --
                                                             -----         -------        ------      -----        --------
BALANCE, MAY 31, 2001 .................................         --              --         3,818        $38        $ 51,813
                                                             =====         =======         =====      =====        ========
<CAPTION>
                                                                                              TOTAL
                                                            ACCUMULATED     DEFERRED      STOCKHOLDERS'
                                                              DEFICIT     COMPENSATION       DEFICIT
                                                            -----------   ------------    -------------
<S>                                                         <C>           <C>             <C>
BALANCE, MAY 31, 1998 .................................       $(52,697)      $   --         $ (1,286)
   Net loss ...........................................         (3,994)          --           (3,994)
   Adjust shares issued for the HMS acquisition .......             --           --              (94)
   Exercise of stock options ..........................             --           --              155
   Dividends on preferred stock .......................            (55)          --               --
   Shares issued for preferred stock conversion .......             --           --               --
   Shares issued for debenture exchange offer .........             --           --              305
                                                              --------       ------         --------
BALANCE, MAY 31, 1999 .................................       $(56,746)      $   --         $ (4,914)
   Net loss ...........................................         (5,766)          --           (5,766)
   Compensatory stock options granted .................             --          (18)              --
   Amortization of deferred compensation ..............             --            8                8
                                                              --------       ------         --------
BALANCE, MAY 31, 2000 .................................       $(62,512)      $  (10)        $(10,672)
   Net loss ...........................................         (1,117)          --           (1,117)
   Compensatory stock options granted .................             --           (1)              --
   Amortization of deferred compensation ..............             --           11               11
                                                              --------       ------         --------
BALANCE, MAY 31, 2001 .................................       $(63,629)      $   --         $(11,778)
                                                              ========       ======         ========
</TABLE>


                             See accompanying notes.


                                       21
<PAGE>   22

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                            YEAR ENDED MAY 31,
                                                                                    2001          2000          1999
                                                                                  --------       -------       -------
                                                                                        (Amounts in thousands)
<S>                                                                               <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations before extraordinary item...................      $ (1,117)     $ (5,766)     $ (3,082)
ADJUSTMENTS TO RECONCILE LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
   Depreciation and amortization............................................           656           794         1,037
   Asset write-down.........................................................            --            10           146
   Provision for doubtful accounts..........................................            --            --         1,641
   Loss in connection with prepayment of note receivable....................           496            --            --
   Gain on sale of assets...................................................            --            (9)           (2)
   Loss on sale of assets...................................................            --             1             4
   Compensation expense - stock options issued..............................            11             8            --
   Restructuring expenses...................................................           (30)           89           455
   Reduction in accrued interest expense ...................................          (290)           --            --
   Goodwill impairment......................................................            --            --            27
CHANGES IN ASSETS AND LIABILITIES:
   Accounts receivable......................................................          (146)          656          (174)
   Accounts receivable - managed care reinsurance contract..................          (783)           --            --
   Accounts receivable - pharmacy and laboratory costs......................        10,469            --        (4,814)
   Other current assets, restricted funds, and other non-current assets.....           746           896          (434)
   Accounts payable and accrued liabilities.................................          (615)         (498)         (379)
   Accrued claims payable...................................................           261        (1,355)         (477)
   Accrued reinsurance claims payable.......................................           783            --            --
   Accrued pharmacy and laboratory costs payable............................       (10,469)           --         4,814
   Income taxes payable.....................................................           (13)          (32)         (109)
   Other liabilities........................................................           (47)         (107)          (31)
                                                                                  --------       -------       -------
   NET CASH USED IN CONTINUING OPERATIONS...................................           (88)       (5,313)       (1,378)

   NET CASH USED IN DISCONTINUED OPERATIONS.................................            --            --        (1,070)
                                                                                  --------       -------       -------
   NET CASH USED IN OPERATING ACTIVITIES....................................           (88)       (5,313)       (2,448)
                                                                                  --------       -------       -------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net proceeds from sale of  hospital property and equipment related to
           discontinued operations..........................................            --            --         4,820
   Net proceeds from sale of property and equipment.........................            --           139            --
   Payment received on note for sale of property and equipment..............           509            25            --
   Additions to property and equipment......................................           (48)         (107)         (768)
                                                                                  --------       -------       -------
   NET CASH PROVIDED BY INVESTING ACTIVITIES................................           461            57         4,052
                                                                                  --------       -------       -------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from the issuance of Common Stock...............................            --            --           158
   Repayment of debt........................................................            --            (2)           (2)
                                                                                  --------       -------       -------
   NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES......................            --            (2)          156
                                                                                  --------       -------       -------
Net increase (decrease) in cash and cash equivalents........................           373        (5,258)        1,760
Cash and cash equivalents at beginning of year..............................         2,518         7,776         6,016
                                                                                  --------       -------       -------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................................      $  2,891       $ 2,518       $ 7,776
                                                                                  ========       =======       =======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid during the year for
        Interest............................................................      $    177       $   180       $   180
                                                                                  ========       =======       =======
        Income taxes........................................................      $     37       $    48       $    87
                                                                                  ========       =======       =======
</TABLE>

                             See accompanying notes.


                                       22
<PAGE>   23

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

NOTE 1 -- DESCRIPTION OF THE COMPANY'S BUSINESS

         Comprehensive Care Corporation (the "Company") is a Delaware
Corporation organized in 1969. Unless the context otherwise requires, all
references to the "Company" include Comprehensive Behavioral Care, Inc.
("CompCare" or "CBC") and subsidiary corporations. The Company, through its
wholly owned subsidiary, CompCare, primarily provides managed care services in
the behavioral health and psychiatric fields, which is its only operating
segment. The Company manages the delivery of a continuum of psychiatric and
substance abuse services to commercial, Medicare, and Medicaid members on behalf
of employers, HMOs, PPOs, government organizations, third-party claims
administrators, and commercial and other group purchasers of behavioral
healthcare services. The managed care operations include administrative service
agreements, fee-for-service agreements, and capitation contracts. The customer
base for its services includes both corporate and governmental entities. The
Company's services are provided by employees or by unrelated vendors on a
subcontract or subcapitated basis.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

         The consolidated financial statements include the accounts of
Comprehensive Care Corporation and its wholly owned subsidiaries. Significant
inter-company accounts and transactions have been eliminated in consolidation.
The results of operations of the hospital business segment, which was disposed
of during Fiscal 1999, are shown in discontinued operations in the accompanying
statements of operations.

USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.

REVENUE RECOGNITION

         The Company's managed care activities are performed under the terms of
agreements with health maintenance organizations ("HMOs"), preferred provider
organizations ("PPOs"), and other payers to provide contracted medical services
to subscribing participants. Under these agreements, revenue arises from
agreements to provide contracted services to qualified beneficiaries and is
earned monthly based on the number of qualified participants regardless of
services actually provided (generally referred to as capitation arrangements).
The Company's revenues from providing other behavioral healthcare services are
earned on a fee-for-service basis and are recognized as services are rendered.

HEALTHCARE EXPENSE RECOGNITION

         The Company attempts to control its costs and risk by entering into
contractual relationships with healthcare providers including hospitals,
physician groups and other managed care organizations either on a sub-capitated,
a discounted fee-for-services, or a per-case basis. The Company's capitation
contracts typically exclude risk for chronic care patients. The cost of
healthcare services is recognized in the period that the Company is obligated to
provide such services. Certain contracted healthcare providers assume the
financial risk for participant care rendered by them and they are compensated on
a sub-capitated basis.

         In cases where the Company retains the financial responsibility for
authorizations, hospital utilization, and the cost of other behavioral
healthcare services, the Company establishes an accrual for estimated claims
payable.

PREMIUM DEFICIENCIES

         Estimated future healthcare costs and expenses in excess of estimated
future premiums are recorded as a loss when determinable. No such deficiencies
existed at May 31, 2001 or May 31, 2000.


                                       23
<PAGE>   24
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES


CASH AND CASH EQUIVALENTS

         Cash in excess of daily requirements is invested in short-term
investments with original maturities of three months or less. These investments
aggregated $1.5 million and $1.8 million at May 31, 2001 and 2000, respectively.
These investments are included in cash equivalents in the accompanying
consolidated balance sheets.

RESTRICTED CASH

         Restricted accounts classified as current assets are required under
capitated contracts, primarily the Puerto Rico contract that expired March 31,
1999 (see Note 17 -- "Commitments and Contingencies", Item 4). Non-current
restricted accounts include $0.3 million of cash held in trust in connection
with the Company's Directors and Officers liability insurance policy.

PROPERTY AND EQUIPMENT

         Property and equipment are recorded at cost. Depreciation of furniture
and equipment is computed using the straight-line method over the estimated
useful lives of 3 to 12 years. Leasehold improvements are amortized over the
term of the related lease.

GOODWILL

         Goodwill includes costs in excess of the fair value of net assets of
businesses purchased. Costs in excess of net assets purchased are amortized on a
straight-line basis up to 20 years. The Company evaluates the recoverability and
the amortization period of goodwill by determining whether the amount of
goodwill recorded can be recovered through undiscounted cash flows of the
business acquired excluding interest expense and amortization over the remaining
amortization period. The Company believes that the remaining $0.9 million of net
recorded goodwill at May 31, 2001 is recoverable from future estimated
undiscounted cash flows. The amounts of goodwill reported in the consolidated
balance sheets are net of accumulated amortization of $494,000 and $422,000 at
May 31, 2001 and 2000, respectively.

ACCRUED CLAIMS PAYABLE

         The accrued claims payable liability represents the estimated ultimate
net amounts owed for all behavioral healthcare services provided through the
respective balance sheet dates.

         The unpaid claims liability is estimated using an actuarial paid
completion factor methodology and other statistical analyses. These estimates
are subject to the effects of trends in utilization and other factors. Although
considerable variability is inherent in such estimates, management believes that
the unpaid claims liability is adequate. The estimates are continually reviewed
and adjusted as experience develops or new information becomes known with
adjustments included in current operations.

INCOME TAXES

         The Company calculates deferred taxes and related income tax expense
using the liability method. This method determines deferred taxes by applying
the current tax rate to net operating loss carryforwards and to the cumulative
temporary differences between the recorded carrying amounts and the
corresponding tax basis of assets and liabilities. A valuation allowance is
established for deferred tax assets unless their realization is considered more
likely than not. The Company's provision for income taxes is the sum of the
change in the balance of deferred taxes between the beginning and the end of the
period and income taxes currently payable or receivable.

STOCK OPTIONS

         The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25, in
the event that the exercise price of the Company's employee stock options is
less than the market price of the underlying stock on the date of grant,
compensation expense is recognized.

         In Fiscal 2001 and 2000, the Company recognized deferred compensation
totaling $1,000 and $18,000, respectively, in relation to options that were
issued to non-employee consultants. Such amounts were based on the


                                       24
<PAGE>   25

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

fair value of the options granted in accordance with SFAS Statement 123,
"Accounting for Stock-based Compensation", and are being amortized to expense
over the vesting period of the options. Amortization for Fiscal 2001 and 2000
amounted to $11,000 and $8,000, respectively.

PER SHARE DATA

         In calculating basic earnings (loss) per share, net income (loss) is
adjusted for dividends on preferred stock and is divided by the weighted average
number of common shares outstanding for the period. Diluted earnings per share
reflects the assumed conversion of all dilutive securities, such as options and
convertible preferred stock. No such exercise or conversion is assumed where the
effect is antidilutive, such as when there is a loss from continuing operations.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments" requires disclosure of fair value information about financial
instruments whether or not recognized in the balance sheet for which it is
practical to estimate that value.

         For cash and cash equivalents, notes receivable, and restricted cash,
the carrying amount approximates fair value. For long-term debt, the fair value
is based on the estimated market price for the Debentures on the last day of the
fiscal year.

         The carrying amounts and fair values of the Company's financial
instruments at May 31, 2001 and 2000, are as follows:

<TABLE>
<CAPTION>
                                                          2001                     2000
                                                    CARRYING     FAIR       CARRYING    FAIR
                                                     AMOUNT      VALUE       AMOUNT     VALUE
                                                    --------    ------      --------   ------
                                                                (AMOUNTS IN THOUSANDS)
         <S>                                       <C>          <C>         <C>        <C>
         ASSETS
         Cash and cash equivalents...........        $2,891     $2,891       $2,518    $2,518
         Notes receivable....................           168        168        1,172     1,172
         Restricted cash.....................           609        609        1,930     1,930
         LIABILITIES
         Long-term debt......................        $2,244     $1,148       $2,244    $  978
</TABLE>


RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
and No. 142, "Goodwill and Other Intangible Assets", which establishes new
standards for the treatment of goodwill and other intangible assets. SFAS 142 is
effective for fiscal years beginning after December 31, 2001 and permits early
adoption for companies with a fiscal year beginning after March 15, 2001. SFAS
142 prescribes that amortization of goodwill will cease as of the adoption date.
Additionally, the Company will be required to perform an impairment test as of
the adoption date, annually thereafter, and whenever events and circumstances
occur that might effect the carrying value of these assets. The Company has not
yet determined whether it will elect early adoption or what effect, if any, the
impairment test of goodwill will have on the Company's results of operations and
financial position.

NOTE 3 -- LIQUIDITY AND CAPITAL RESOURCES

         For the years ended May 31, 2001, 2000, and 1999, the Company incurred
losses from continuing operations of approximately $1.1 million, $5.8 million,
and $3.0 million, respectively. As of May 31, 2001, the Company had a working
capital deficiency of approximately $11.8 million and a stockholders' deficit of
approximately $11.8 million. In addition, for the years ended May 31, 2001,
2000, and 1999, continuing operations used cash of approximately $0.1 million,
$5.3 million, and $1.4 million, respectively. The working capital deficiency
referred to above results primarily from a $12.1 million liability related to
Federal income tax refunds received in prior years. The ultimate outcome of the
Internal Revenue Service audit whereby it is seeking recovery of the refunds
from the Company, including the amount to be repaid, if any, and the timing
thereof, is not determinable (see Note 13 -- "Income Taxes").


                                       25
<PAGE>   26

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

         The Company cannot state with any degree of certainty whether any
required additional equity or debt financing to meet its obligations will be
available to it during Fiscal 2002 and, if available, that the source of
financing would be available on terms and conditions acceptable to the Company.

         The above conditions raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustment that may result from the outcome of
this uncertainty.

         During Fiscal 2001 and 2000, management has taken steps to trim costs
and save cash, including making significant staff reductions, centralizing
certain contract management and clinical functions, and eliminating the
Company's California administrative office and related executive staff
positions. The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing as may be required and, ultimately, to
attain profitability.

NOTE 4 -- MAJOR CONTRACTS/CUSTOMERS

(1)      The Company had contracts with Humana Health Plans ("Humana") under
         which it provided services to members in Florida. Effective June 30,
         2000, Humana completed the sale of its North Florida Medicaid business
         to HealthEase of Florida, Inc. Additionally, Humana's contracts with
         the Company, which cover specific commercial, Medicaid and Medicare
         populations of approximately 60,000 members in Florida terminated
         September 30, 2000. Fiscal 2001 operations include $0.7 million, or
         3.7%, of operating revenue specific to the Humana contracts compared to
         $6.0 million, or 33.8%, and $6.8 million, or 17.4%, for the fiscal
         years ended May 31, 2000, and 1999, respectively.

         Effective July 1, 2000, the Company entered into a contract with one
         HMO to continue to provide behavioral healthcare services to
         approximately 100,000 of 160,000 Florida members that were managed by
         the Company under contracts with Humana as of June 2000. The initial
         term of this contract is for one year and the contract provides for
         automatic annual extensions. The combined revenue from the contracts
         that were transitioned from Humana, plus one existing contract that the
         Company had with this HMO and one new contract that the Company has
         with an affiliate of this HMO, accounted for 24.1%, or $4.6 million, of
         the Company's operating revenues during the fiscal year ended May 31,
         2001 compared to 2.3%, or $0.4 million, for the fiscal year ended May
         31, 2000.

         Additionally, one contract includes a provision that the Company,
         through its contract with this HMO, receives additional funds directly
         from a state reinsurance program. During the quarter ended May 31,
         2001, the Company filed reinsurance claims totaling approximately $0.8
         million. This amount was included in revenue with a corresponding
         amount as claims expense in the accompanying financial statements.
         Additionally, as these reinsurance claim amounts remain outstanding as
         of May 31, 2001, the Company has reported the $0.8 million as a
         component of accounts receivable, with a corresponding amount that has
         been included in accrued claims payable, in the accompanying balance
         sheet. In the event that these reinsurance amounts are not collected by
         the Company, the Company could remain liable to perform services for
         the specific members that qualify for such reimbursements. Subsequent
         to May 31, 2001, the Company has collected 100% of the $0.8 million
         that was included in accounts receivable at May 31, 2001. For
         non-reinsurance claims incurred but not reported under this contract,
         the Company estimates its claims payable using a similar method as that
         used for other existing contracts. As of May 31, 2001, there was a
         limited amount of historical data available to the Company for use in
         such estimates specific to this contract. Thus, actual results could
         differ from the claims payable amount reported as of May 31, 2001.
         While the Company believes its estimate to be adequate, management will
         review and make any necessary changes to its estimate as additional
         data becomes available.

(2)      The Company has two contracts with one HMO to provide behavioral
         healthcare services to contracted members in Texas. These combined
         contracts represented approximately 9.0%, or $1.7 million, 11.8%, or
         $2.1 million, and 6%, or $2.4 million, of the Company's operating
         revenue for the fiscal years ended May 31, 2001, 2000, and 1999,
         respectively. The Company renewed these contracts for two years, with
         effective dates of February 8, 2000.

(3)      During the fiscal year ended May 31, 2001, the Company implemented five
         new contracts to provide behavioral healthcare services to Florida
         members under contracts with one HMO. For the fiscal year


                                       26
<PAGE>   27

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

         ended May 31, 2001, these five contracts represented approximately
         18.7%, or $3.5 million, of the Company's operating revenue.

(4)      During Fiscal 1999, the Company provided services to members of Humana
         Health Plans of Puerto Rico, Inc. under the terms of management service
         agreements, which expired on April 30, 1999. For the fiscal year ended
         May 31, 1999, these agreements accounted for approximately 44%, or
         $17.1 million, of the Company's operating revenues from continuing
         operations.

         The Company's contracts with its customers are typically for initial
one-year terms, with automatic annual extensions. Such contracts generally
provide for cancellation by either party with 60 to 90 days' written notice.

NOTE 5 -- ACCOUNTS RECEIVABLE

Accounts receivable consists of the following:

<TABLE>
<CAPTION>
                                                                             MAY 31,
                                                                       2001          2000
                                                                      ------        ------
                                                                     (Amounts in thousands)
<S>                                                                  <C>            <C>
Accounts receivable - managed care capitation contracts ......        $  391        $  231
Other trade accounts receivable ..............................            42            58
                                                                      ------        ------
   Total accounts receivable .................................        $  433        $  289
                                                                      ======        ======
</TABLE>

The following table summarizes changes in the Company's allowance for doubtful
accounts for the years ended May 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                       BALANCE      ADDITIONS                     WRITE-OFF
                                      BEGINNING    CHARGED TO    RECOVERIES           OF           BALANCE
                                       OF YEAR       EXPENSE         **            ACCOUNTS      END OF YEAR
                                      ---------    ----------    ----------       ---------      -----------
                                                             (Amounts in thousands)
<S>                                   <C>          <C>           <C>              <C>            <C>
Year ended May 31, 2001 ........        $  13        $     9        $   --         $    (11)        $   11
Year ended May 31, 2000 ........        $ 923        $    11        $ (268)        $   (653)        $   13
Year ended May 31, 1999* .......        $ 893        $ 3,582        $ (268)        $ (3,284)        $  923
</TABLE>


          *Includes $1,673 charged to discontinued operations.
         **Excludes $448 in 2001 and $349 in 2000 of recoveries from accounts
           previously written off.

         Recoveries are reflected on the Company's statement of operations as a
reduction to the provision for doubtful accounts.

NOTE 6 -- OTHER RECEIVABLE

         Other receivable at May 31, 2001 and 2000 represents $2.5 million paid
to a vendor to prepare a federal income tax refund that is more fully described
in Note 13. The costs incurred will be refunded to the Company should the
Internal Revenue Service ("IRS") disallow the refund and require its repayment.
To the extent that all or some portion of the refund is allowed by the IRS, the
fees paid will be recognized as expense in proportion to the amount of refund
allowed.

NOTE 7 -- OTHER CURRENT ASSETS

         Other current assets consist of the following:

<TABLE>
<CAPTION>
                                                                             MAY 31,
                                                                       2001          2000
                                                                      ------        ------
                                                                     (Amounts in thousands)
<S>                                                                  <C>            <C>
Accounts receivable - other(a) ...............................        $  473        $   23
Prepaid insurance ............................................           207            57
Prepaid building rent ........................................            69            --
Other prepaid fees and expenses ..............................            68            67
                                                                      ------        ------
   Total other current assets ................................        $  817        $  147
                                                                      ======        ======
</TABLE>

(a) May 31, 2001 amount includes a $0.3 million bad debt recovery and $0.1
million for an insurance settlement received in June 2001, which are more fully
described in Note 18.


                                       27
<PAGE>   28

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

NOTE 8 -- PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                                 MAY 31,
                                                                            2001           2000
                                                                           ------         ------
                                                                           (Amounts in thousands)
     <S>                                                                   <C>            <C>
     Furniture and equipment ......................................        $3,359         $3,346
     Leasehold improvements .......................................            40            145
     Capitalized leases ...........................................             3             --
                                                                           ------         ------
                                                                            3,402          3,491
     Less accumulated depreciation ................................        (2,847)        (2,405)
                                                                           ------         ------
     Net property and equipment ...................................        $  555         $1,086
                                                                           ======         ======
</TABLE>

NOTE 9 -- NOTES RECEIVABLE

         On August 31, 2000, the Company entered into a prepayment agreement and
note modification with Jefferson Hills Corporation ("JHC") in connection with
the secured promissory note, which originated out of the sale in Fiscal 1999 of
the Company's Aurora, Colorado facility to JHC (see Note 14). The terms of the
prepayment agreement required JHC to immediately remit $500,000 to the Company
as a prepayment on the note. Additionally, the note was modified to reflect a
remaining balance due totaling $170,000 and to require JHC to make monthly
principal and interest payments until April 2006. One final principal payment in
the amount of approximately $146,000 will be due from JHC in April 2006. As an
inducement to JHC to make such prepayment, the Company credited JHC with an
aggregate of approximately $996,000. As a result, the Company recorded a
non-operating loss during the quarter ended August 31, 2000 of approximately
$496,000 in connection with this transaction.

Notes receivable consist of the following:


<TABLE>
<CAPTION>
                                                                                             MAY 31,
                                                                                      2001           2000
                                                                                     ------         ------
                                                                                     (Amounts in thousands)
     <S>                                                                             <C>            <C>
     8% promissory note, payable in monthly installments of approximately
        $1,400, with a $146,000 principal payment due at maturity on
        April 1, 2006 (see Note 14) .........................................        $  168         $1,172
     Less current maturities ................................................            (4)           (27)
                                                                                     ------         ------
                                                                                     $  164         $1,145
                                                                                     ======         ======
</TABLE>

NOTE 10 -- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                                                             MAY 31,
                                                                                      2001          2000
                                                                                     ------        -------
                                                                                     (Amounts in thousands)
          <S>                                                                        <C>           <C>
          Accounts payable......................................................     $    549      $   628
          Accrued restructuring.................................................           --          104
          Accrued salaries and wages............................................          371          558
          Accrued vacation......................................................          125          168
          Accrued legal and audit...............................................          221          503
          Payable to third-party intermediaries.................................        1,050        1,321
          Other accrued liabilities.............................................          954          921
          Deferred compensation.................................................           32           29
                                                                                     --------      -------
                                                                                     $  3,302      $ 4,232
                                                                                     ========      =======
</TABLE>


                                       28
<PAGE>   29

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

NOTE 11 - RESTRUCTURING

         During Fiscal 2000, following the termination of two major contracts on
December 31, 1999, the Company underwent a restructuring that included the
closing of the Company's California administrative office, terminating related
executive and staff positions, and centralizing certain contract management and
clinical functions. The Company incurred restructuring charges of $881,000 in
connection therewith, including a separation payment of $760,000 to the
Company's former Chairman and CEO. Rentals under the lease for the California
office were assumed by an entity affiliated with the Company's former Chairman
and CEO. In addition, during Fiscal 1999, the Company incurred restructuring
charges of $600,000 related to the loss of a major contract in Puerto Rico.
Following is an analysis of the restructuring charges together with related
payments reflected in a reserve for restructuring charges:

<TABLE>
<CAPTION>
FISCAL 2001
                                                       BALANCE                                       BALANCE
                                                       JUNE 1,                     PAYMENTS/         MAY 31,
                                                        2000        EXPENSE         CHARGES           2001
                                                                      (Amounts in thousands)
                                                       -----------------------------------------------------
     <S>                                               <C>          <C>            <C>               <C>
     RESTRUCTURING:
       Severance and separation benefits ......        $   --        $   --         $     --         $   --
         Write-off of assets ..................            10           (10)              --             --
         Other closing costs ..................            35           (20)             (15)            --
                                                       ------        ------         --------         ------
     Totals ...................................        $   45        $  (30)        $    (15)        $   --
      Puerto Rico and other prior reserves ....            59            --              (59)            --
                                                       ------        ------         --------         ------
     Totals ...................................        $  104        $  (30)        $    (74)        $   --
                                                       ======        ======         ========         ======
</TABLE>


<TABLE>
<CAPTION>
FISCAL 2000
                                                       BALANCE                                       BALANCE
                                                       JUNE 1,                     PAYMENTS/         MAY 31,
                                                        1999        EXPENSE         CHARGES           2000
                                                                      (Amounts in thousands)
                                                       -----------------------------------------------------
     <S>                                               <C>          <C>            <C>               <C>
     RESTRUCTURING:
       Severance and separation benefits ......        $   --        $  721         $   (721)        $   --
         Write-off of assets(1) ...............            --           116             (106)            10
         Other closing costs ..................            --            44               (9)            35
                                                       ------        ------         --------         ------
     Totals ...................................        $   --        $  881         $   (836)        $   45
      Puerto Rico and other prior reserves ....           433           (50)            (324)            59
                                                       ------        ------         --------         ------
     Totals ...................................        $  433        $  831         $ (1,160)        $  104(2)
                                                       ======        ======         ========         ======
</TABLE>

(1)      Includes $90,000 for write-off of leasehold improvements.
(2)      Included in Accounts payable and accrued liabilities at May 31, 2000
         (see Note 10 - "Accounts Payable and Accrued Liabilities").


<TABLE>
<CAPTION>
FISCAL 1999
                                                       BALANCE                                       BALANCE
                                                       JUNE 1,                     PAYMENTS/         MAY 31,
                                                        1998        EXPENSE         CHARGES           1999
                                                                      (Amounts in thousands)
                                                       -----------------------------------------------------
     <S>                                               <C>          <C>            <C>               <C>
     RESTRUCTURING:
       Severance and separation benefits ......        $   --        $  178         $   (143)        $   35
         Write-down of fixed assets(1) ........            --           242              (32)           210
         Other closing costs ..................            --           180               --            180
                                                       ------        ------         --------         ------
     Totals ...................................        $   --        $  600         $   (175)        $  425
      Other prior reserves ....................             8            --               --              8
                                                       ------        ------         --------         ------
     Totals ...................................        $    8        $  600         $   (175)        $  433
                                                       ======        ======         ========         ======
</TABLE>


(1) Includes $177,000 for write-off of leasehold improvements.


                                       29
<PAGE>   30

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

NOTE 12 -- LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                            MAY 31,
                                                                                       2001         2000
                                                                                    ---------      -------
                                                                                    (Amounts in Thousands)
          <S>                                                                       <C>            <C>
          7 1/2% convertible subordinated debentures due April, 2010, interest
             payable semi-annually in April and October.........................      $ 2,244      $ 2,244
                                                                                      =======        =====
</TABLE>


         On July 24, 1998, the Company completed a debenture exchange offer with
its debentureholders. An aggregate of $0.4 million of principal amount of
Debentures, representing approximately 17% of the issued and outstanding
Debentures, were tendered for exchange to the Company pursuant to the terms of
the Exchange Offer and a total of 33,185 shares of Common Stock were issued by
the Company. The resulting gain on the Debenture Exchange of $0.1 million after
related costs and expenses was recorded as an extraordinary gain in the
accompanying consolidated statement of operations for the year ended May 31,
1999. The debentures are convertible into approximately 9,000 shares of Common
Stock at a conversion price of $248.12 per share.

NOTE 13 -- INCOME TAXES

         Provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED MAY 31,
                                                                                  2001      2000     1999
                                                                                  ----      ----     ----
                                                                                  (Amounts in thousands)
         <S>                                                                     <C>        <C>     <C>
         Current:
         Federal..........................................................       $ --       $ --    $  --
         State............................................................         35         13     (146)
                                                                                 ----       ----    -----
                                                                                 $ 35       $ 13    $(146)
                                                                                 ====       ====    =====
</TABLE>


         Reconciliation between the provision for income tax applicable to
continuing operations and the amount computed by applying the statutory Federal
income tax rate (34%) to loss from continuing operations before income tax is as
follows:

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED MAY 31,
                                                                                    2001        2000          1999
                                                                                    ----        ----          ----
                                                                                         (Amounts in thousands)
      <S>                                                                           <C>      <C>           <C>
     Income tax benefit at the statutory tax rate...............................    $ (317)  $ (1,957)     $ (1,407)
     State income tax benefit, net of federal tax effect........................       (37)      (228)         (158)
     Non-deductible items.......................................................       111        161            52
     Benefit of net operating loss carryforward not recognized..................       243      2,024         1,286
     Other, net.................................................................        35         13            81
                                                                                   -------   --------      --------
                                                                                   $    35   $     13      $   (146)
                                                                                   =======   ========      ========
</TABLE>


                                       30
<PAGE>   31

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

         Significant components of the Company's deferred tax assets and
deferred tax liabilities are as follows:

<TABLE>
<CAPTION>
                                                                                                  MAY 31,
                                                                                           2001             2000
                                                                                           ----             ----
                                                                                          (Amounts in thousands)
    <S>                                                                                 <C>            <C>
    Deferred Tax Assets:
         Net operating loss carryforwards.......................................         $ 15,296       $ 15,345
         Alternative minimum tax credits........................................              667            667
         Payable to Third Party Intermediaries..................................              361            459
         Employee benefits and options..........................................              160            191
         Other, net.............................................................              296            406
                                                                                         --------       --------
              Total Deferred Tax Assets.........................................           16,780         17,068
         Valuation Allowance....................................................          (15,863)       (16,151)
                                                                                         --------       --------
         Net Deferred Tax Assets................................................              917            917
                                                                                         --------       --------
     Deferred Tax Liabilities:
         State income taxes.....................................................             (386)          (386)
         Cash to accrual differences............................................             (531)          (531)
                                                                                         --------            ---
              Total Deferred Tax Liabilities....................................             (917)          (917)
                                                                                         --------       --------
     Net Deferred Tax Assets....................................................         $      0       $      0
                                                                                         ========       ========
</TABLE>

         At May 31, 2001, the Company had Federal accumulated net operating loss
carryforwards of approximately $40.3 million, which expire in 2010 through 2021.
In addition, the Company has a minimum tax credit carryover of approximately
$0.7 million against regular tax in the event that regular tax expense exceeds
the alternative minimum tax expense.

         The Company may be unable to utilize some or all of its allowable tax
deductions or losses, which depends upon factors including the availability of
sufficient taxable income from which to deduct such losses during limited
carryover periods. Further, the Company's ability to use any net operating
losses may be subject to limitation in the event that the Company issues or
agrees to issue substantial amounts of additional equity. The Company monitors
the potential for "change of ownership" and believes that its financing plans as
contemplated will not cause a "change of ownership"; however, no assurances can
be made that future events will not act to limit the Company's tax benefits.

         After consideration of all the evidence, both positive and negative,
management has determined that a valuation allowance at May 31, 2001 and 2000,
was necessary to offset the deferred tax assets based on the likelihood of
future realization.

UNBENEFITTED TAX REFUNDS RECEIVED

         In connection with the filing of its Federal income tax returns for
fiscal year 1995 and 1996, the Company filed a tentative refund claim to carry
back losses described in Section 172(f) of the Internal Revenue Code ("IRC"),
requesting a refund of $9.4 million and $5.5 million, respectively, of which
refunds of $9.4 million and $5.4 million were received. In addition, the Company
also filed amended Federal income tax returns for fiscal years prior to 1995,
requesting similar refunds for losses carried back under Section 172(f) of $6.2
million for 1986; $0.4 million for 1985; $0.7 million for 1983; and $0.4 million
for 1982, a total of $7.7 million.

         Section 172(f) of the IRC provides for a ten year net operating loss
carryback for specific losses attributable to (1) a product liability or (2) a
liability arising under a federal or state law or out of any tort if the act
giving rise to such liability occurs at least three years before the beginning
of the taxable year. The applicability of Section 172(f) to the type of business
in which the Company operates is unclear. No assurance can be provided that the
Company will be able to retain the refunds received to date or that the other
refunds requested will be received.

         During fiscal years 1997 and 1996, the Company recognized a portion of
the refunds received as a tax benefit of $0.3 million and $2.4 million,
respectively. The balance of the refunds received, $12.1 million, is recorded as
a deferred liability, "Unbenefitted tax refunds received", pending resolution by
the Internal Revenue


                                       31
<PAGE>   32

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

Service ("IRS") of the appropriateness of the 172(f) carryback. The other
refunds requested under Section 172(f) for prior years of $7.7 million have not
been received, nor has the Company recognized any tax benefit related to these
potential refunds.

         On August 21, 1998, the Company received an examination report, dated
August 6, 1998, from the IRS advising the Company that it was disallowing $12.4
million of the $14.8 million of refunds previously received, and the additional
refunds requested of $7.7 million. If the position of the IRS were to be upheld
the Company would be required to repay $12.4 million in refunds previously
received, plus accrued interest of approximately $6.7 million through May 31,
2001. Accordingly, the Company would be entitled to a repayment of the fees
advanced to its tax advisor relating to these refunds of approximately $2.5
million, which is reported as "other receivable" in the accompanying balance
sheets. This report commenced the administrative appeals process. The Company
filed a protest letter with the IRS on November 6, 1998. The IRS reserves the
right to assess and collect the tax previously refunded to the Company at any
time during the appeals process.

         On July 11, 2000, the Company submitted an Offer in Compromise (the
"Offer") to the Appeals Office of the IRS to resolve the controversy with
respect to the refunds at a substantially reduced amount. The IRS is currently
evaluating the Offer. A preliminary meeting with the IRS with respect to the
Offer took place in October 2000 and, subsequent to this meeting, the Company
has provided additional documents to the IRS. The Company has continued its
discussions with the IRS during the first quarter of Fiscal 2002 and expects to
continue such discussions during the second quarter of Fiscal 2002. There can be
no assurance that the IRS will accept the Offer.

         If the IRS were to disallow the refunds claimed, or the terms of the
Offer in Compromise as presented or modified are not adhered to, the Company
will have additional loss carry forwards of approximately $50 million, which
will expire if unused by the year 2010.

NOTE 14 -- DISCONTINUED OPERATIONS

         On March 11, 1999, the Company sold its Aurora, Colorado hospital for
$3.3 million of cash plus a $1.2 million note receivable (see Note 9), and
recognized a loss on sale of $416,000. This sale completed the Company's plan to
dispose of its hospital business segment. Financial information relating to the
operation of the discontinued hospital business follows:

<TABLE>
<CAPTION>

                                                                               FISCAL YEAR ENDED
                                                                                 MAY 31, 1999*
                                                                             (Amounts in thousands)
<S>                                                                          <C>
Operating revenues........................................................          $ 2,713
Costs and expenses:
   Healthcare operating expenses..........................................            2,492
   General and administrative expenses....................................               16
   Provision for doubtful accounts........................................              521
   Depreciation and amortization..........................................               18
                                                                                    -------
                                                                                      3,047
                                                                                    -------
Loss from operations......................................................          $  (334)
                                                                                    =======
</TABLE>

         *Year-to-date through the November 30, 1998 measurement date.

         During the fiscal year ended May 31, 1999, the Company sold its
non-operating facility located in Fort Worth, Texas for $1.8 million in cash,
which approximated its net book value.

NOTE 15 -- EMPLOYEE BENEFIT PLAN

         The Company offers a 401(k) Plan (the "Plan"), which is a defined
contribution plan qualified under Section 401(k) of the Internal Revenue Code,
for the benefit of its eligible employees. All full-time and part-time employees
who have attained the age of 21 and have completed six consecutive months of
employment are eligible to participate in the Plan. Effective June 1, 1995,
eligibility was modified to six months of employment and a minimum of twenty
(20) regularly scheduled hours per week. Each participant may contribute from 2%
to 15% of his or her compensation to the Plan subject to limitations on the
highly compensated employees to ensure the Plan is non-discriminatory. Company
contributions are discretionary and are determined by the Company's Board of
Directors or the Planning Committee. The Company's employer matching
contributions were $10,000, $17,000, and $22,000 to the Plan in Fiscal 2001,
2000, and 1999 respectively.


                                       32
<PAGE>   33

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

NOTE 16 -- PREFERRED STOCK, COMMON STOCK, AND STOCK OPTION PLANS

Preferred Stock

         The Company is authorized to issue up to 60,000 shares of Preferred
Stock, $50.00 par value, in one or more series, each series to have such
designation and number of shares as the Board of Directors may fix prior to the
issuance of any shares of such series. Each series may have such preferences and
relative participation, optional or special rights with such qualifications,
limitations or restrictions stated in the resolution or resolutions providing
for the issuance of such series as may be adopted from time to time by the Board
of Directors prior to the issuance of any such series.

         The Board of Directors had designated 41,260 shares of Preferred Stock
as Series A Non-Voting 4% Cumulative Convertible Preferred Stock, $50 par value
(the "Preferred Stock). On January 17, 1997, the Preferred Stock was issued in
exchange for the secured convertible note due January 9, 1997, in the principal
amount of $2.0 million and bearing interest at the rate of 12% per annum and
$63,000 of interest accrued thereon. The Preferred Stock had a cumulative
quarterly dividend of 4% per annum which was payable when and as declared by the
Board of Directors. However, no dividends were to be paid on the Preferred Stock
until the Company had positive stockholder's equity. The Preferred Stock was
preferred to the extent of $50 per share plus accrued dividends; was convertible
into shares of Common Stock at $6 per share, which was the same price at which
the principal of the note was exchangeable; and had no voting privileges.

         During February 1999, the 41,260 outstanding shares of Preferred Stock
were converted into 343,833 shares of Common Stock.

Common Stock

         On April 19, 1988, the Company declared a dividend of one common share
purchase right ("Right") for each share of Common Stock outstanding at May 6,
1988. Each Right entitles the holder to purchase one share of Common Stock at a
price of $300 per share, subject to certain anti-dilution adjustments. The
Rights are not exercisable and are transferable only with the Common Stock until
the earlier of ten days following a public announcement that a person has
acquired ownership of 25% or more of the Company's Common Stock or the
commencement or announcement of a tender or exchange offer, the consummation of
which would result in the ownership by a person of 30% or more of the Company's
Common Stock. In the event that a person acquires 25% or more of the Company's
Common Stock or if the Company is the surviving corporation in a merger and its
Common Stock is not changed or exchanged, each holder of a Right, other than the
25% stockholder (whose Rights will be void), will thereafter have the right to
receive on exercise that number of shares of Common Stock having a market value
of two times the exercise price of the Right. If the Company is acquired in a
merger or more than 50% of its assets are sold, proper provision shall be made
so that each Right holder shall have the right to receive or exercise, at the
then current exercise price of the Right, that number of shares of Common Stock
of the acquiring company that, at the time of the transaction, would have a
market value of two times the exercise price of the Right. The Rights are
redeemable at a price of $.20 per Right at any time prior to ten days after a
person has acquired 25% or more of the Company's Common Stock.

         Authorized shares of common stock reserved for possible issuance for
convertible debentures and stock options are as follows at May 31, 2001:

<TABLE>
     <S>                                                                               <C>
     Convertible debentures.....................................................            9,044
     Outstanding stock options..................................................          888,525
     Possible future issuance under stock option plans..........................          214,184
                                                                                        ---------
     Total......................................................................        1,111,753
                                                                                        =========
</TABLE>

Stock Option Plans

         The Company has a 1995 Incentive Plan (the "1995 Plan"). The 1995 Plan
provides for the granting of stock options, stock appreciation rights, limited
stock appreciation rights, and restricted stock grants to eligible employees and
consultants to the Company. Grants issued under the 1995 Plan may qualify as
Incentive Stock Options ("ISOs") under Section 422A of the Internal Revenue
Code. Options for ISOs may be granted for terms of up to ten years and are
generally exercisable in cumulative increments of either 33% each year or 50%
each six



                                       33
<PAGE>   34

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

months. Options for Non-statutory Stock Options ("NSOs") may be granted for
terms of up to 13 years. The exercise price for ISOs must equal or exceed the
fair market value of the shares on the date of grant, and 65% in the case of
other options. The 1995 Plan also provides for the full vesting of all
outstanding options under certain change of control events. The maximum number
of shares authorized for issuance under the 1995 Plan is 1,000,000. As of May
31, 2001, there were 28,350 options available for grant and there were 888,525
options outstanding, of which 653,275 options were exercisable, under the 1995
Plan.

         On November 17, 1998, the Company's Board of Directors approved the
re-pricing of stock option grants to employees below the level of Executive
Officers, subject to each employee returning his or her old options for
cancellation. The cancelled options were replaced by an equivalent number of new
options at an exercise price equal to the November 30, 1998 closing price of
$3.5625.

         On December 14, 1998, the Company's Board of Directors approved the
re-pricing of stock option grants for Executive Officers, subject to each
Executive Officer returning his or her old options for cancellation. For every
two options cancelled under the 1988 Incentive Stock Option and Non-statutory
Stock Option Plans, one option was reissued under the 1995 Incentive Stock
Option Plan. For every four options cancelled under the 1995 Incentive Stock
Option Plan, three new options were reissued. All reissued options are subject
to the provisions of the 1995 Plan, including vesting in accordance with the
Company's vesting policy. The exercise price of the reissued options equals the
December 14, 1998 closing price of $4.00.

         The Company has a non-qualified stock option plan for its outside
directors (the "Directors' Plan"). Each non-qualified stock option is
exercisable at a price equal to the Common Stock's fair market value as of the
date of grant. Initial grants vest annually in 25% increments beginning on the
first anniversary of the date of grant, provided the individual is still a
director on those dates. Annual grants will become 100% vested as of the first
annual meeting of the Company's stockholders following the date of grant,
provided the individual is still a director as of that date. An optionee who
ceases to be a director shall forfeit that portion of the option attributable to
such vesting dates on or after the date he or she ceases to be a director. The
maximum number of shares authorized for issuance under the Directors' Plan is
250,000. As of May 31, 2001, there were 185,834 options available for grant
under the Directors' Plan. The Company had no outside directors and there were
no options outstanding to former directors as of May 31, 2001.

A summary of the Company's stock option activity and related information for the
years ended May 31 is as follows:

<TABLE>
<CAPTION>
                                                                                                          WEIGHTED
                                                                                                      AVERAGE EXERCISE
                                                                                  SHARES                    PRICE
                                                                                 --------             ----------------
     <S>                                                                         <C>                  <C>
     Outstanding as of May 31, 1998............................................   724,215                   $ 9.24
     Cancelled.................................................................  (474,550)                    9.15
     Granted...................................................................   548,651                     5.21
     Exercised.................................................................   (22,000)                    7.20
     Forfeited.................................................................  (208,283)                    8.84
                                                                                 --------

     Outstanding as of May 31, 1999............................................   568,033                   $ 5.63
     Cancelled.................................................................  (222,500) (a)                4.89
     Granted...................................................................   896,750                     0.48
     Forfeited.................................................................  (357,608)                    4.14
                                                                                 --------

     Outstanding as of May 31, 2000............................................   884,675                   $ 1.19
     Granted...................................................................   181,000                     0.29
     Forfeited.................................................................  (177,150)                    2.05
                                                                                 --------

     Outstanding as of May 31, 2001............................................   888,525                   $ 0.84
                                                                                 ========
</TABLE>

(a)      Includes 120,000 options exercisable at $6.6875 per share held by
         former Chief Executive Officer that were cancelled in connection with
         his separation from the Company in January 2000.



                                       34
<PAGE>   35

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

A summary of options outstanding and exercisable as of May 31, 2001 follows:

<TABLE>
<CAPTION>
                                                 WEIGHTED-          WEIGHTED-                         WEIGHTED-AVERAGE
                             EXERCISE             AVERAGE            AVERAGE                          EXERCISE PRICE OF
          OPTIONS             PRICE              EXERCISE           REMAINING          OPTIONS           EXERCISABLE
        OUTSTANDING           RANGE                PRICE        CONTRACTUAL LIFE     EXERCISABLE           OPTIONS
        -----------      ------------------     ----------      ----------------     -----------      -----------------
        <S>              <C>                    <C>             <C>                  <C>              <C>
          331,000        $  0.25 - $ 0.2656       $ 0.26              9.04             195,750              $ 0.26
          453,500        $  0.50 - $ 0.5625       $ 0.56              8.44             353,500              $ 0.55
          104,025        $3.5625 - $   4.00       $ 3.92              7.53             104,025              $ 3.92
          -------                                                                      -------
          888,525                                 $ 0.84              8.56             653,275              $ 1.00
          =======                                                                      =======
</TABLE>

         Adjusted pro forma information regarding net income or loss and
earnings or loss per share is required by SFAS 123, and has been determined as
if the Company had accounted for its employee stock options under the fair value
method of SFAS 123. The weighted average fair values of options granted were
$0.14, $0.41, and $4.91 in Fiscal 2001, 2000, and 1999, respectively. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.

         The fair value of these options was estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED MAY 31,
                                                                          2001          2000               1999
                                                                        --------     ------------        --------
     <S>                                                                <C>          <C>                 <C>
     Volatility factor of the expected market price of the
        Company's Common Stock...................................          95.0%            65.0%           63.0%
     Expected life (in years) of the options.....................       5 and 4      6, 5, and 4         5 and 4
     Risk-free interest rate.....................................           5.8%             6.5%            5.5%
     Dividend yield..............................................             0%               0%              0%
</TABLE>

The Company's pro forma information is as follows (in thousands except for loss
per share information):

<TABLE>
<CAPTION>

                                                                                       YEAR ENDED MAY 31,
                                                                               2001           2000          1999
                                                                             --------       ---------     ---------
     <S>                                                                     <C>            <C>           <C>
     Pro forma net loss attributable to common stockholders...............   $ (1,132)      $ (6,461)     $ (4,773)
     Pro forma net loss per common share:
        Basic.............................................................   $  (0.30)      $  (1.69)     $  (1.34)
        Diluted...........................................................   $  (0.30)      $  (1.69)     $  (1.34)
</TABLE>



                                       35
<PAGE>   36

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

NOTE 17 -- COMMITMENTS AND CONTINGENCIES

Lease Commitments

         The Company leases certain facilities and equipment. The facility
leases contain escalation clauses based on the Consumer Price Index and
provisions for payment of real estate taxes, insurance, and maintenance and
repair expenses. Total rental expense for all operating leases applicable to
continuing operations was $0.7 million, $0.8 million, and $1.3 million for
fiscal years 2001, 2000, and 1999, respectively. During Fiscal 2000 and Fiscal
1999, the Company received rental income of $84,000 and $106,000, respectively,
in connection with the sublease of a portion of its California facilities (which
were closed in Fiscal 2000) to entities operated by the Company's former Chief
Executive Officer ("CEO"). The Company has no future obligation under the
California lease, having completed a transfer of this lease in Fiscal 2000 to an
entity managed by the Company's former CEO.

         On February 2, 2001, the Company entered into a lease agreement for
premises to serve as the principal business and executive offices for the
Company and CBC, its principal operating subsidiary. CBC is the principal lessee
under the lease, and the Company is the guarantor of the lease. The lease, which
began on March 22, 2001, is for a term of 5 years and 2 months and provides for
a base rent of approximately $22,000 per month for the first 12 months of the
lease term, with intervening escalations during each successive 12 month period
under the lease term, with a final monthly rental of approximately $25,000. In
connection with this lease, the Company posted a lease security deposit in
February 2001, in the amount of $65,000.

         Future minimum payments, by year and in the aggregate, under
non-cancelable operating leases with initial or remaining terms of one year or
more, consist of the following at May 31, 2001:

<TABLE>
<CAPTION>
         FISCAL YEAR                                                                 OPERATING LEASES
                                                                                     ----------------
                                                                                  (Amounts in thousands)
         <S>                                                                      <C>
         2002...................................................................         $   530
         2003...................................................................             423
         2004...................................................................             387
         2005...................................................................             211
         2006...................................................................              73
         Later Years............................................................               0
                                                                                         -------
         Total minimum lease payments...........................................         $ 1,624
                                                                                         =======
</TABLE>

Other Commitments and Contingencies

(1)      During the fiscal year ended May 31, 2000, the Company renewed one
         contract, which included a requirement that the Company maintains a
         $550,000 performance bond throughout the two-year renewal term of the
         contract. This bond was secured by a $150,000 cash deposit, which is
         included in the non-current, restricted cash balance at May 31, 2001
         and 2000. The original term of the bond was for one year and the bond
         is automatically renewable as long as the contract remains in force.

(2)      On February 19, 1999, the California Superior Court denied the
         Company's Petition for Writ of Mandate of an adverse administrative
         appeal decision regarding application of the Maximum Inpatient
         Reimbursement Limitation to Medi-Cal reimbursement paid to Brea
         Neuropsychiatric Hospital for its fiscal periods 1983 through 1986.
         This facility was owned by the Company until its disposal in fiscal
         year 1991. The subject matter of the Superior Court action involved the
         refusal of the administrative law judge to order further reductions in
         the liability for costs associated with treating high cost, long stay
         Medi-Cal patients, which are commonly referred to as "outliers". The
         Company does not plan to appeal the California Superior Court decision
         for which the Notice of Entry of Judgment was entered on February 26,
         1999.

         During the year ended May 31, 2001, the Company lowered its estimate by
         approximately $0.3 million specific to interest charges that were
         previously accrued in connection with this liability. This change in
         estimate was based on information provided to the Company by the
         California Department of Health Services. As of May 31, 2001, the
         Company has approximately $1.0 million accrued relating to this matter.

         On March 29, 2001, the Company submitted an offer to the State of
         California to resolve this liability at a substantially reduced amount.
         On April 23, 2001, the Company received a letter, dated April 11, 2001,


                                       36
<PAGE>   37

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

         from the State of California advising the company that its proposed
         settlement offer was not accepted and, additionally, requesting payment
         of approximately $0.8 million. The Company is contemplating a second
         settlement offer. There can be no assurance that the State of
         California will give consideration to such offer or agree to alternate
         terms.

(3)      With respect to the contingency related to prior years' income taxes,
         see Note 13, "Income Taxes".

(4)      During the year ended May 31, 2001, the Company reached an agreement
         with Humana to resolve all outstanding disputed matters with Humana
         Health Plans of Puerto Rico, Inc. related to the Company's contract
         with Humana, which expired on March 31, 1999. Such settlement did not
         require any payment by either party. As a result of the resolution, the
         Company has removed the $10.5 million receivable and related accrued
         claims payable from the accompanying balance sheet. These amounts were
         specific to the pharmacy and laboratory costs that were the financial
         responsibility of the Company, but were administered by Humana. Because
         of the uncertainty surrounding the determination of the actual pharmacy
         and laboratory costs incurred, the Company had previously reported a
         100% loss ratio for the contract. Additionally, as a result of the
         resolution, Humana released approximately $1.0 million to the Company,
         which was previously restricted in accordance with the terms of the
         contract. Accordingly, the May 31, 2001 balance sheet reflects the
         reclassification of $1.0 million from restricted cash to cash and cash
         equivalents.

(5)      The Company would remain liable to perform the services covered under
         subcapitation agreements if the parties with which the Company
         subcapitates were unable to fulfill their responsibilities under such
         agreements.

         From time to time, the Company and its subsidiaries are also parties
and their property is subject to ordinary, routine litigation incidental to
their business. In some pending cases, claims may exceed insurance policy limits
and the Company or any one of its subsidiaries may have exposure to a liability
that is not covered by insurance. Management believes that the outcome of such
lawsuits will not have a material adverse impact on the Company's financial
statements.

REGULATORY MONITORING AND COMPLIANCE

         The Company is subject to extensive and evolving state and federal
regulations, including licensure and compliance with regulations related to
healthcare providers, insurance companies, and other risk assuming entities.
These laws and regulations may vary considerably among states and, as a result,
the Company may be subject to the specific regulatory approach adopted by each
state for the regulation of managed care companies and for providers of
behavioral healthcare treatment services. Currently, management cannot quantify
the potential effects of additional regulation of the managed care industry, but
such costs could have an adverse effect on future operations to the extent that
they are not able to be recouped in future managed care contracts.

         The Company is subject to the requirements of the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"). The purpose of the HIPAA
provisions is to improve the efficiency and effectiveness of the healthcare
system through standardization of the electronic data interchange of certain
administrative and financial transactions and, also, to protect the security and
privacy of transmitted information. Entities subject to HIPAA include all
healthcare providers and all healthcare plans. To meet the specific requirements
of HIPAA, the Company will incur costs to insure the adequacy and security of
its healthcare information system and communication networks. Additionally, the
Company may incur costs to implement the specific transaction codes required by
HIPAA for claims, payment, enrollment, eligibility, or to become compliant with
security and privacy rules, which may be more stringent for providers of certain
behavioral healthcare services. The expected timetable to be compliant is
currently October 2002 for transaction code changes and April 2003 for
compliance with the privacy rules. The Company is currently evaluating its
systems and policies that are impacted by HIPAA. While these efforts will be
ongoing, the Company expects to meet all compliance rules and timetables with
respect to the HIPAA regulations. Failure to do so may result in penalties and
have a material adverse effect on the Company's ability to retain its customers
or to gain new business.


                                       37
<PAGE>   38
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

NOTE 18 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
FISCAL 2001                                                                    QUARTER ENDED                            FISCAL YEAR
                                                          8/31/00        11/30/00         2/28/01         5/31/01           TOTAL
                                                          -------         -------         -------         -------         --------
                                                                       (Amounts in thousands, except per share data)
<S>                                                       <C>             <C>             <C>             <C>             <C>
NET SALES...............................................  $ 3,739         $ 4,441         $ 4,560         $ 6,234         $ 18,974
                                                          -------         -------         -------         -------         --------
GROSS PROFIT............................................      522             833             907             604            2,866
                                                          -------         -------         -------         -------         --------
General and administrative expenses.....................      952             929             930           1,006            3,817
Recovery of doubtful accounts...........................      (15)            (26)            (41)           (357)            (439)
Depreciation and amortization...........................      172             169             168             147              656
Other expense (income)..................................      523            (268)           (215)            (91)             (51)
                                                          -------         -------         -------         -------         --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS...  $(1,110)(a)        $ 29 (b)        $ 65 (c)     $  (101)(d)     $ (1,117)
                                                          =======         =======         =======         =======         ========
Basic and diluted net income (loss) per share...........  $ (0.29)(a)     $  0.01 (b)      $ 0.02 (c)     $ (0.03)(d)     $  (0.29)
                                                          =======         =======         =======         =======         ========
Weighted Average Common Shares Outstanding..............    3,818           3,818           3,818           3,818            3,818
                                                          =======         =======         =======         =======         ========
</TABLE>

(a) Includes a $0.5 million non-operating loss related to the note receivable
prepayment arrangement.
(b) Includes a $0.3 million reduction in interest expense in connection with a
change in estimate specific to one third party liability and $0.2 million of
income in connection with one legal settlement.
(c) Includes $0.2 million of income in connection with one legal settlement.
(d) Includes a $0.3 million bad debt recovery specific to one contract that
terminated in 1999 and $0.1 million of non-operating income specific to proceeds
received from one insurance settlement in which the Company was a claimant.


<TABLE>
<CAPTION>
FISCAL 2000                                                                    QUARTER ENDED                            FISCAL YEAR
                                                          8/31/99        11/30/99         2/29/00         5/31/00           TOTAL
                                                          -------         -------         -------         -------         --------
                                                                       (Amounts in thousands, except per share data)
<S>                                                       <C>             <C>             <C>             <C>             <C>
NET SALES...............................................  $ 5,250         $ 4,882         $ 3,790         $ 3,797         $ 17,719
                                                          -------         -------         -------         -------         --------
GROSS PROFIT............................................    1,169 (a)         343             (34)            440            1,918
                                                          -------         -------         -------         -------         --------
General and administrative expenses.....................    2,089 (a)       1,888           1,767           1,230            6,974
Recovery of doubtful accounts...........................     (336)           (163)            (76)            (31)            (606)
Depreciation and amortization...........................      215             215             181             183              794
Restructuring expenses..................................       --              --             884             (53)             831
Other expense (income)..................................      (51)            (51)             (3)           (204)            (309)
                                                          -------         -------         -------         -------         --------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS............  $  (748)        $(1,546)(b)     $(2,787)(c)     $  (685)(d)     $ (5,766)
                                                          =======         =======         =======         =======         ========
Basic and diluted net loss per share....................  $ (0.20)        $ (0.40)(b)     $ (0.73)(c)     $ (0.18)(d)     $  (1.51)
                                                          =======         =======         =======         =======         ========
Weighted Average Common Shares Outstanding..............    3,818           3,818           3,818           3,818            3,818
                                                          =======         =======         =======         =======         ========
</TABLE>

(a) Reflects a $0.6 million reclassification between Healthcare Operating and
General and Administrative Expenses to conform to the 2001 presentation. This
reclassification had no effect on the previously reported results of operations
or stockholders' deficit.
(b) Includes $0.1 million of costs in connection with the NCQA accreditation.
(c) Includes $0.9 million of restructuring expenses in connection with the
elimination of the Company's California office and affiliated employees and
approximately $0.1 million of non-operating gains.
(d) Includes $0.3 million of revenue related to favorable cost report
settlements completed during the year and $0.1 million of non-operating gains,
primarily related to property tax refunds received specific to assets disposed
of during Fiscal 1999 or earlier.

Fiscal 2000 results also included approximately $0.1 million of operating costs
incurred to manage the Company's Year 2000 readiness program.



                                       38



<PAGE>   39

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                                    PART III

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

         None.

ITEMS 10 AND 11.  DIRECTORS AND EXECUTIVE  COMPENSATION

         The Company expects to file its definitive proxy statement with the
Securities and Exchange Commission no later than 120 days after the end of the
fiscal year. The information set forth therein under "Election of Directors" and
"Executive Compensation" is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information required is set forth under the caption "Principal
Stockholders" in the proxy statement for the 2001 annual meeting of stockholders
and is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information required is set forth under the caption "Election of
Directors" in the proxy statement for the 2001 annual meeting of stockholders
and is incorporated herein by reference.


                                       39
<PAGE>   40

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a) 1.   Financial Statements - Included in Part II of this report:
              Report of Independent Certified Public Accountants
              Consolidated Balance Sheets, May 31, 2001 and 2000
              Consolidated Statements of Operations, Years Ended May 31, 2001,
              2000 and 1999 Consolidated Statements of Stockholders' Deficit,
              Years Ended May 31, 2001, 2000 and 1999 Consolidated Statements of
              Cash Flows, Years Ended May 31, 2001, 2000 and 1999 Notes to
              Consolidated Financial Statements

         2.   Financial Statement Schedules:

              None.

         Other schedules are omitted, as required information is inapplicable or
the information is presented in the consolidated financial statements or related
notes.

         3.   Exhibits:

<TABLE>
<CAPTION>
         Number                     Description and Reference
         ------                     -------------------------
         <S>      <C>
         3.1      Restated Certificate of Incorporation as amended. (7)
         3.2      Restated Bylaws as amended July 20, 2000. (14)
         4.1      Indenture dated April 25, 1985 between the Company and Bank of America, NT&SA,
                  relating to Convertible Subordinated Debentures. (1)
         4.2      Rights Agreement dated as of April 19, 1988 between the Company and Security
                  Pacific National Bank.(2)
         4.3      Rights Agreement between the Registrant and Continental Stock Transfer & Trust
                  Company dated April 19, 1988 restated and amended October 21, 1994. (6)
         4.4      Form of Common Stock Certificate. (11)
         10.1     Form of Stock Option Agreement. *(3)
         10.2     Form of Indemnity Agreement as amended March 24, 1994. *(5)
         10.3     The Company's Employee Savings Plan as amended and restated as of June 30, 1993.
                  *(4)
         10.4     1988 Incentive Stock Option and 1988 Non-statutory Stock Option Plans, as amended.
                  *(6)
         10.5     Directors and Officers Trust dated February 27, 1995 between the Company and Mark
                  Twain Bank. *(7)
         10.6     Comprehensive Care Corporation 1995 Incentive Plan. *(9)
         10.7     Amended and Restated Non-Employee Director's Stock Option Plan. *(8)
         10.9     Employment agreement dated September 14, 1998 between the Company and Robert J.
                  Landis. *(12)
         10.10    Addendum to employment agreement between the Company and Robert J. Landis. (13)
         10.11    Employment agreement dated July 2, 1999 between the Company and Mary Jane Johnson.
                  *(10)
         21.      List of the Company's active subsidiaries (filed herewith).
         23.      Consent of Richard A. Eisner & Company, LLP (filed herewith).
         99.1     Comprehensive Care Corporation 1995 Incentive Plan, as amended on November 17, 1998. (15)
</TABLE>

-------------------
* Management contract or compensatory plan or arrangement with one or more
directors or executive officers.

(1)      Filed as an exhibit to the Company's Form S-3 Registration Statement
         No. 2-97160.
(2)      Filed as an exhibit to the Company's Form 8-K dated May 4, 1988.
(3)      Filed as an exhibit to the Company's Form 10-K for the fiscal year
         ended May 31, 1988.
(4)      Filed as an exhibit to the Company's Form 10-K for the fiscal year
         ended May 31, 1991.
(5)      Filed as an exhibit to the Company's Form 10-K for the fiscal year
         ended May 31, 1994.
(6)      Filed as an exhibit to the Company's Form 10-Q for the quarter ended
         November 30, 1994.


                                       40
<PAGE>   41

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

(7)      Filed as an exhibit to the Company's Form 10-Q for the quarter ended
         February 28, 1995.
(8)      Filed as an exhibit to the Company's Form 10-K for the fiscal year
         ended May 31, 1995.
(9)      Filed as an exhibit to the Company's Form 8-K dated January 30, 1997.
(10)     Filed as an exhibit to the Company's Form 8-K dated July 2, 1999.
(11)     Filed with original of Registration Statement on Form S-1, dated
         January 29, 1997.
(12)     Filed as an exhibit to the Company's Form 8-K dated September 24, 1998.
(13)     Filed as an exhibit to the Company's Form 8-K dated November 25, 1998.
(14)     Filed as an exhibit to the Company's Form 10-K for the Fiscal Year
         ended May 31, 2000.
(15)     Filed as an exhibit to the Company's Form 8-K dated November 25, 1998.

(b)  Reports on Form 8-K.

         1)       The Company filed a current report on Form 8-K, dated March 2,
                  2001, to report under Item 5 that the Company's principal
                  operating subsidiary, Comprehensive Behavioral Care, Inc.
                  ("CBC") had been selected by one HMO to manage behavioral
                  healthcare benefits for its Connecticut members.

                  Additionally, the Company reported that on February 2, 2001,
                  CBC entered into a new, five-year lease agreement for premises
                  located at 200 South Hoover Blvd., Suite 200, Tampa, Florida
                  33609 and that these new premises would be occupied by both
                  CBC and the Company and will serve as the principal business
                  and executive offices of both CBC and the Company.



                                       41
<PAGE>   42

                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                                   SIGNATURES

         Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, August 24, 2001.

                         COMPREHENSIVE CARE CORPORATION

                               By   /s/      MARY JANE JOHNSON
                                  ----------------------------------------------
                                           Mary Jane Johnson
                                  President and Chief Executive Officer
                                      (Principal Executive Officer)


                               By   /s/      ROBERT J. LANDIS
                                  ----------------------------------------------
                                                Robert J. Landis
                                      Chief Financial Officer and Treasurer
                                   (Principal Financial and Accounting Officer)


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates so indicated.

<TABLE>
<CAPTION>
SIGNATURE                              TITLE                                            DATE
<S>                                    <C>                                           <C>
                                       Chairman of the Board of Directors,
                                       Chief Financial Officer, and Treasurer
                                       (Principal Financial and
/s/   ROBERT J. LANDIS                 Accounting Officer)                           August 24, 2001
-------------------------------
Robert J. Landis

                                       President, Chief Executive Officer,
/s/   MARY JANE JOHNSON                and Director                                  August 24, 2001
-------------------------------
Mary Jane Johnson
</TABLE>
<PAGE>   43
                 COMPREHENSIVE CARE CORPORATION AND SUBSIDIARIES

                                  Exhibit Index

                         Fiscal Year Ended May 31, 2001

<TABLE>
<CAPTION>
EXHIBIT
NUMBER    DESCRIPTION                                                PAGE NUMBER
------    -----------                                                -----------
<S>       <C>                                                        <C>
21        List of the Company's subsidiaries  ............................43
23        Consent of Richard A. Eisner & Company, LLP  ...................44
</TABLE>